The use of trusts is widely recommended in financial planning, however, never forget that there are rules to abide by to ensure that you benefit from this practice, says Pieter Willem Moolman.
One instance where the correct use of a trust will surely be placed under the spotlight is in the event of divorce.
A reader, who is in the middle of a messy divorce, wanted to know from me whether the assets that have been transferred to a trust are “safe” from these proceedings. To answer his question, let us consider the operation of a trust.
When set up correctly, a trust is seen as a separate entity. It is a legal arrangement contained in a contract known as the trust deed in terms of which one party, the founder, transfers property to a trustee who is required to administer the property as directed by the founder for the benefit of the beneficiaries or for the purpose stated in the trust deed.
As soon as the beneficiaries have accepted the benefits under the trust deed, they may enforce the terms thereof, but, prior to their accepting these benefits, the founder and the trustees can agree to cancel the trust.
It is preferable that two or more trustees are appointed. If you are the only trustee of “your” trust, it could be seen as an alter ego and the assets deemed to be your own, nullifying its purpose.
An independent trustee, that is, someone who is not a beneficiary of the trust, is also vital.
The beneficiaries are the persons who will receive the income and/or capital of the trust. In a discretionary trust the beneficiaries may receive the income once the trustees exercise their discretion.
The beneficiaries are only entitled to the income if the trustees allocate it to them. It is possible and normal for trustees to also be beneficiaries, however, keep in mind the important proviso of having an independent trustee.
It is not only important to structure a trust correctly with regard to the nomination of trustees and so on, it is crucial that the transactions entered into are properly documented and authorised.
Firstly, the trustees need to meet regularly to discuss trust business. Such meetings must be minuted and decisions taken should be reduced to a resolution that states which of the trustees were present and who is taking action.
So, for example, before a trust can acquire or dispose of assets, a resolution documenting this decision should be drafted referring to the meeting held by the trustees where the decision was taken to act.
What happens all too frequently is that a trust is set up by, say, Peter Jones. Even if there are other trustees appointed along with Peter, it may not necessarily be enough to convince an outsider that the trust is indeed a separate entity.
If, for example, Peter transfers money in and out of the trust’s bank account without accounting for it, he is running the risk that the separation of the trust from himself can be watered down.
Furthermore, the transfer of assets from Peter’s estate to the trust must also be properly structured, with underlying transactions of sale or donation put in place and, where applicable, the creation of loan accounts.
A trust is therefore a safe haven, but be very careful to use it correctly!