Adding and removing beneficiaries from a trust


Summary

The need to amend a trust deed is brought about by many factors, including changes in legislation, economic factors, or the personal circumstances of parties to the trust. The laws governing trusts and tax should be considered carefully before any change is enacted, to ensure that such an amendment is legally binding and does not trigger unexpected capital gains or transfer duty.

Introduction

The Trust Property Control Act contains very little law regarding trusts, as its main purpose was to codify important aspects related to trust administration. To understand the full spectrum of legal principles governing South African trust law, one must consider the body of law developed by our judges and courts.

South African case law has determined that the juristic nature of an inter vivos trust is based on the principles of a contract for the benefit of a third party, which creates important rights for trust beneficiaries that must be considered when a trust deed is amended.

Contract in favour of a third party

An inter vivos trust is based on the common law concept of stipulatio alteri, a contract entered into for the benefit of a third party. The founder of the trust contracts the trustees to administer the trust assets for the benefit of the beneficiaries, being the third party. Once a beneficiary has accepted a benefit from the trust, they too become a party to this contract and any amendment to the trust deed cannot necessarily be amended without their consent.

Chief's Directive

The Master of the High Court has sought to clarify the principles governing the requirements for the amendment of trust deeds by issuing a “Chief Master's Directive”.

The Master has confirmed that the founder and trustees may vary the trust provisions without the cooperation of beneficiaries, on condition that no beneficiary has accepted a benefit from the trust.

Once a beneficiary has accepted a benefit from the trust, that beneficiary becomes a party to the trust instrument and must agree to any amendment. Should the founder and trustees make an amendment without the consent of the beneficiaries who have accepted a benefit from the trust, such an amendment would be invalid and will be of no legal consequence.

However, if the trust deed expressly allows for an amendment without the involvement of the beneficiaries, the consent of the beneficiaries who have vested rights may not be required.

Value shifting arrangements

An amendment of beneficiaries of a trust may trigger capital gains tax if the change is deemed to be a value shifting arrangement. A value shifting arrangement occurs when an amendment of the trust deed increases the market value of the interest of a connected person to the trust. Such a situation may arise, for instance, because of wholesale changes to trust beneficiaries.

Transfer duty considerations

An amendment of beneficiaries of a trust may also inadvertently trigger the payment of transfer duty. Many years ago, it was a favoured ploy to avoid payment of transfer duty by holding immovable property in trust. Instead of selling the immovable property and triggering payment of transfer duty, the trust deed would be amended to make the new owners the trustees and beneficiaries of the trust.

This unintended loophole was plugged with the enactment of the Revenue Laws Amendment Act 74 of 2002. This amendment levies transfer duty on the value of any residential property acquired by any person by way of a transaction or in any other manner, including by adding new beneficiaries to a trust.

Conclusion

Trusts continue to be a critical component of family office inheritance structures. It is therefore critically important for founders and trustees to understand the trust law and tax consequences of adding and removing beneficiaries.



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