Trusts need to be seen as a legacy builder

Jonathan Faurie, FAnews Journalist

Many adults want to leave their children with a legacy, something that they have worked their whole life to achieve, and then hand down to the next generation. While this has traditionally been in the form of family companies, perhaps we should be looking towards trusts as a more effective way to achieve this.

There are a lot of legal considerations which one needs to keep in mind when setting up a trust. This ensures that it is reputable and does not come under scrutiny from authorities which may mistakenly view the trust as a sham.

Knowing the legal background

Rigard Sevenster (CFP), Fiduciary Specialist at Glacier, points out that without going into legal jargon, trust law in South Africa is primarily based on two things.

"The law is based on the Trust Property Control Act of 1988 and common law principles. This should not be confused with the numerous fiscal laws that govern the taxation of trusts. In layman's terms, common law principles are those legal principles and precedents based on previous court judgements and rulings,” says Sevenster.

These previous court cases form the precedents on which future legal requirements and legal proceedings involving trusts may be based.

It comes down to losing control

Like a family business, there are a lot of misconceptions when it comes to setting up a trust. Most people see trusts as a savings vehicle whereby they can put assets into, and then draw out as they see fit. But Sevenster points out that this goes completely against the concept of a trust and puts them and the trust in a very vulnerable position.

"Essentially, a trust is a legal arrangement, a contract, under which the founder transfers ownership of assets into the care of another person, a trustee, to be administered for the benefit of a third person or group of people. The key phrase here is transfer ownership. It is one of the essential elements of a trust. There has to be real intention of the founder to give over ownership. When you, as the founder, hand assets over to the trustees, they no longer belong to you and you can no longer treat those assets as your own. The control over those assets should now lie with the trustees,” says Sevenster.

Different roles cause confusion

In essence there should be three separate parties in a trust and they should operate independently from one another. This however does not happen as the person who sets up the trust is eligible to become a trustee of the trust.

And it does not end there, the person who sets up the trust can also be a beneficiary of the trust. The only stipulation is that they cannot be the sole beneficiary of the trust. It is this concession that creates estate planning avenues but simultaneously creates the biggest headaches.

"The difficulty for most of us is to separate the idea of ownership and control and enjoyment of an asset. If I gave the asset, and I manage the asset, and I also enjoy the asset, then surely it must be mine and I can control it? Here lies the catch; you gave up ownership of the asset as the founder. It is not yours to control anymore. If you are also listed as one of the trustees, then the asset's ownership vests in your capacity as a trustee, not in your personal capacity. This is a legal concept that has been elaborated on in our courts,” adds Sevenster.

No quick-fixes for troubles on the horizon

There is also the possibility that some trusts may be seen as a vehicle for money laundering and hiding away cash which is owed to creditors.

"An important side note is that a court can undo an individual's transfer to a trust if it finds that the transfer was made with the intention of defrauding creditors or to avoid assets being part of a divorce settlement. These transfers are considered fraudulent and in some cases carry legal penalties. It is vital to plan for asset protection well before you even anticipate being the subject of any liability. Just as vital is that you work closely with experienced and credible legal professionals before engaging in any measure of asset protection,” concludes Sevenster.

The role of trusts in the South African landscape

While the traditional view is that a family company is the best way to secure the future of your family, one just has to bear in mind the international statistics regarding this.

This issue was raised at the recent Discovery Financial Planning Summit. Dr Tom Deans, President of Détente Financial Corporation, pointed out that only 20% of family owned businesses do not last past the second generation. A large number of owners of company businesses pass away without leaving a will this leaves a significant burden on the family.

"Succession planning is becoming a key element in financial services industries around the world. You cannot see a business as an asset one can hand down from generation to generation. The purpose of a business is to make money, and then be sold,” says Deans.

A trust does not lose profitability and a trust does not need succession planning. A trust can also be handed down through multiple generations without the succession planning.

Editor's Thoughts:
Succession planning does not get the attention it deserves. Make this a priority in your practice and get involved with your client's succession planning, the gap does exist. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.