TRUSTS AS A MECHANISM FOR ESTATE PLANNING
6.8 MAKE SURE THE TRUST IS VALID
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Multi-ownership of assets - businesses, farms or other property is sometimes difficult to divide between heirs. By placing the asset in a trust, it is held intact, with your heirs the beneficiaries of the income generated by the asset.*
Cost saving - assets in the trust are not subject to any fees or costs of winding up an estate.*
Flexibility - Trusts provide wider choices, giving you flexibility if tax, political or economic situations change significantly.The trust object must be valid and whether the trust object is personal or impersonal. It must be defined with certainty.
A trustee may not act without authority from the Master but lack of such authority does not invalidate the trust.
It is not an essential requirement to transfer trust property to the trustee for a trust to be valued. The loss of an existing trust does not invalidate the trust.
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THE TAXATION OF TRUST INCOME
The definition of a "person" in Section 1 includes a trust.
As a result of an amendment in Section 6(1), trusts are no longer entitled to the primary rebate.
In terms of Section 25B of the Act:
Any income received by or accrued to or in favour of any person in his capacity as the trustee of a trust
shall,subject to the provisions of Section 7,
to the extent that it has been derived for the immediate or future benefit, of an ascertained beneficiary with a vested right
be deemed to be income accrued to the beneficiary otherwise be deemed to be the income of the trust fund.
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In cases where the beneficiary has acquired a vested right to the trust income as a result of the trustee exercising his discretion,such income is deemed to accrue to the beneficiary. Unless S 7 intervenes, income awarded to a beneficiary at the discretion of the trustee will be treated as that beneficiary's income (S 25B(2)).Where the income accrues to the beneficiary in terms of these provisions, any deductions or allowances relating to this income are to be permitted to be claimed by the beneficiary.
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Any deductions and allowances which are not allowed to flow through to the beneficiaries can be deducted against the taxable income of the trust in the same tax year. Such deductions and allowances are limited to the taxable income in the trust before taking into consideration the deductions and allowances. If the trust is not subject to tax in the Republic the deductions and allowances can be deducted in the following year of assessment from income which the beneficiary of the trust receives in that year.
The deductions and allowances which exceed the taxable income of the trust can be deducted in the following year of assessment from income which the beneficiary of the trust receives in that year.
If during the year of assessment a resident acquires a vested right to capital of an offshore trust:-
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and the capital arose from income received or accrued to the trust or from any receipts or accruals of such trust which would have constituted income if such a trust had been a resident, in any previous year of assessment during which the resident had a contingent right to income, and
the income or receipts and accruals has not been taxed in the Republic such capital amount shall be included in the income of the resident.
GENERAL PRINCIPLES
S 25B( I) ensures that, if the terms of the will or deed under which a trust is created are such that the administrator or trustee is required to pay income to a particular beneficiary, that income accrues and is deemed to accrue, to the beneficiary. He is the person to be assessed to tax on the income and not the trustee as representative taxpayer. The trustee is a mere conduit pipe by means of which the income is conveyed to the beneficiary who is legally entitled to it.
It sometimes happens that beneficiaries are not stipulated in the trust deed but the trustee is legally obliged to pay over the income to beneficiaries nominated by him in the exercise of a discretionary power conferred upon him by the deed. The income IS
regarded as having been received by the beneficiaries so nominated by the trustee.
Since S 25B is made subject to S 7,before applying it one would first have to ensure that the provisions ofS 7(1)(2),(2A), (3),(4),(5), and (6) are inapplicable.
Where the beneficiary has a vested right in the income that beneficiary will be taxed. If there is no vested right but merely a contingent right then it cannot be said that income has accrued (ITC 76(1927( (at 70)):
"Vesting implied the transfer ofdominium and the children had clearly not in the year under review acquired dominium of the trust income or any portion thereof
A vesting right was something substantial, something which could be measured in money, something which had a present value and could be attached. A contingent interest was merely a spes - an expectation which might never be realized. From its very nature it could not have a definite presentvalue. In the income tax sense, therefore, a vestedright was an accrued right."
With discretionary trusts, the trustee or administrator has a discretion to distribute the income or portion of it to the beneficiaries. There can be no accrual of income to the beneficiaries until the trustee exercises his discretion and makes a distribution among the beneficiaries. As soon as the trustee exercises his discretion, the contingent right of
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beneficiary becomes a vested one and he is liable to tax on the income distributed to him, provided that the provisions ofS 7(2),(3),(4),(5) and (6) are not applicable.