A trust may be established in various ways. The two most common ones are either through a contract (between living persons) or by way of a last will and testament. In the case of the former, the trust is based on a contract between the founder and trustees in terms of which assets must be managed for the benefit of specified beneficiaries. Contract law principles, therefore, apply to this type of trust.

Trust provisions:

If a trust is created by way of a will, this document forms the basis of the trust and the provisions contained therein constitutes the trust deed in which all the rules relating to the trust are stipulated. Thus, it becomes important that the provisions of the trust must be outlined properly since a trust created in terms of a will cannot be amended without intervention by the High Court after the death of the person who established the trust (the testator), and provisions remain part of the will.

Major practical problems may later arise if a will stipulates that assets are bequeathed to a trust created in the will but contains no provisions on the contents of the trust deed. The will is the trust deed, and if it contains no detail regarding the trust’s provisions, trustees have only the Trust Property Control Act to rely on, which does not contain sufficient detail concerning the administration of a trust.

It is very important that, if a trust is created in your will, sufficient and well-planned provisions concerning the trust must be included in the will, especially a specific power to adapt the trust deed to changing circumstances, if required, and to create rules for this.

Expiry of Testamentary Trust:

There are many testamentary trusts where the trust deed stipulates that the trust shall expire at a particular stage, for example, a provision that the trust expires when the youngest beneficiary reaches a certain age. Suppose a testator bequeaths a farm to each of his 3 grandsons in a testamentary trust and stipulates in the will (which is also the trust deed) that the trust shall expire when the grandchild reaches the age of 35.

Grandpa passes away when the grandsons are still quite young. The trusts are registered while winding up Grandpa’s estate, and the farms are transferred to the trusts. After school, the grandsons start farming on their farms, and the trusts created are convenient instruments in which to keep the assets of the farming enterprise. Since there is land in the trust already, it can be used as security and additional land is purchased in the trusts.

Nobody considers the fact that the trust expires when a child turns 35. The trustees are no longer able to keep the assets in the trust, and the provision in the will (which is also the trust deed) can only be amended with an application to the High Court. Upon expiry of the trust, the assets must be transferred to the beneficiary in question, with accompanying costs and tax which could have been avoided if the will (the trust deed) had stipulated that the expiry date of the trust would be determined at the discretion of the trustees.

Estate Planning:

A properly drafted will forms an integral part of a person’s estate planning, as does the use of a trust created in the will. It is common practice to use the right of usufruct or a similar right to take care of a surviving spouse and save estate tax simultaneously.

The full property right of anything consists of two components, namely the so-called bare dominium and usufruct. A person who has bare dominium is the owner of the asset but cannot gain any economic advantage from it while usufruct is vested in someone else. Usufruct, on the other hand, means that someone may use the economic benefit from an asset while it is owned by someone else.

An example of this would be when a father bequeaths his farm to his son, subject to usufruct right for his spouse. The son owns the farm but cannot receive economic benefits from it. The mother may farm on the land or rent it out but may not bequeath it to someone else or sell the farm without the son’s cooperation. The usufruct vests in the mother personally and she can also not bequeath this to someone else. The usufruct will expire at a time specified in the will. Once the usufruct expires, the bare dominium owner normally becomes the asset owner automatically.

Since the surviving spouse inherits the usufruct, its value can be subtracted for estate duty calculation purposes.

A similar outcome may be achieved by using a testamentary trust. The Estate Duty Act states that where assets are bequeathed to a trust and the trustees have discretion as to who should benefit from the trust, no deduction will be allowed in the calculation of estate duty. It may therefore be argued that if the trustees of a trust have no discretion as to who may benefit from the trust and only the surviving spouse may benefit, a deduction concerning the calculation of estate duty will in fact be allowed.

It is, however, important that in a case like this the will and trust deed must be worded very carefully, as is apparent from the example below:

A farm is bequeathed to a testamentary trust as a going concern. The provisions of the trust deed are of such a nature that the trust is discretionary. It is stipulated that the surviving spouse, while alive, is the only beneficiary of the trust. Only upon her passing will the children qualify as beneficiaries of the trust. The question is whether a deduction will be allowed in the calculation of estate duty since the surviving spouse is the only beneficiary during her lifetime – the trustees cannot benefit anyone else during this period. 

The problem with the situation above is that the trustees still have the discretion to accumulate the capital and income in the trust and not distribute these to the surviving spouse. Therefore, the bequest to the trust will not qualify as a deduction for estate duty calculation purposes.

From the above examples, it is clear that a last will and testament should be drawn up with the necessary attention to detail and skill to give proper effect to the intent of the testator and to avoid tax and other pitfalls.