Monday, December 13, 2010

BEQUESTS AND DONATIONS TO TRUSTS

A beneficiary in terms of a will can be a natural person, trust, legal person or institution. The same applies to donations. We will focus mainly on bequests to inter vivos trusts and discuss a few aspects regarding bequests to existing testamentary trusts.


Bequests to an inter vivos trust

Bequests to an inter vivos (family) trust means the bequests are made to a trust already registered at the time a will is drawn up. The trust is named as beneficiary. In the absence of such a trust at the death of the testator, the bequest will lapse or devolve upon another nominated substitute beneficiary.

Bequests may also be made to a family trust to be created after the death of the testator. In this case the beneficiaries and trustees must be named in the will, and the will must also stipulate that if the trust is not registered within a certain period of time (usually two to three months after the appointment of the executor, otherwise the winding up of the estate could be delayed), the bequest will lapse.

Bequests to children, for example, may be made subject to the proviso, or voluntary choice by them, that they create a trust within a specified period of time after the death of the testator and that the trust to be created will become the beneficiary in their stead.

The testator or donor cannot be prescriptive and impose changes on an inter vivos deed of trust and must accept the provisions thereof. The trustees must be able to receive the bequest.

However, as the creator of an inter vivos trust the testator may nominate a trustee in his place or trust beneficiaries in his will, on condition that such powers are bestowed in the deed of trust.

Unconditional bequests are transferred and handed to the trustees by the executor and are administered in accordance with the provisions of the deed of trust. If the bequests are subject to, for example, the payment of a bequest price, the trustees will be given possession of the bequests once that price has been paid.

If, for example, the bequest is subject to a usufruct by the testator’s surviving spouse, the wording of the will is very important. Examples of two types of wording and the implications of the respective bequests are briefly discussed below.

1. “I bequeath my estate to the trustees of the ABC FAMILY TRUST (no. T123/2009) subject to the life usufruct by my said spouse, who will be exempt from furnishing any surety.”

As there is no stipulation that the inheritance must be placed under the control of the trustees, the fixed property (with registered or recorded usufruct) will, as in the case of an “ordinary” usufruct, be transferred in the name of the trust, and other assets such as shares and investments will be transferred in the name of the usufructuary and cash will be paid out to her.

She may occupy the property or let it and all income is payable to her direct. She is responsible for the payment of expenses such as rates and taxes, utility accounts and ordinary maintenance, but not for larger expenses in respect of damage not caused by her or for wear and tear. The latter costs are be payable by the trust as the bare owner. The trust is also responsible for the payment of short-term insurance premiums if not taken out voluntarily and maintained by the usufructuary.

The trustees therefore has control over only the fixed property, as well as any other trust assets not passed by inheritance, and will only gain full control of the rest of the usufruct assets once the usufruct has ended.

Should the trust be terminated before the usufruct ends, the capital beneficiaries will be replaced as bare owners.

2. “I bequeath my estate to the trustees of the ABC FAMILY TRUST (no. T123/2009) who are to administer it to the benefit of the beneficiaries in terms of the deed of trust, subject to the life usufruct by my said spouse, who will be exempt from furnishing any surety. I stipulate explicitly that this inheritance will vest in the trustees and be administered by them.”

This provision makes it very clear that the trustees will be in full control of all usufruct assets, including other trust assets. In this case not only the fixed property but also all other estate assets will be transferred in the name of the trust and cash will be paid to the trust. The trustees will be responsible for the letting of the fixed property, expenses, insurance and maintenance of assets and investments.

The usufructuary will still be able to occupy the dwelling and enjoy the right of use of movable property such as furniture and vehicles. The trustees will have to administer the assets inherited from the estate separately from the other trust assets, for various reasons. One of these is that only the spouse as usufructuary is to receive all net income from the usufruct assets, and other income beneficiaries of the trust cannot share in this.

Income cannot be paid to her at the discretion of the trustees and she is not entitled to part of the capital as stipulated in the deed of trust. However, she may also be an income beneficiary in respect of the other trust assets. Therefore there must also be a separate income and expenditure account.

It is also important that when the usufruct ends, the usufruct assets can be identified easily for the calculation of estate duty and capital gains tax. After that they can become mixed up with the other trusts assets and only one income and expenditure account will be required.

If the trust is terminated before the usufruct ends, the capital beneficiaries will also be replaced as bare owners.

Bequests to an existing testamentary trust

This is when testator A bequeaths some or all of his estate assets to the testamentary trust of the late B, who is already deceased when A’s will is drawn up.

The testamentary trust of the late B must therefore already be active and in operation when testator A dies, otherwise no vesting can occur at the death of testator A. The bequest will then lapse or devolve upon another substitute (nominated) beneficiary.

Testator A (or a donor) can also not be prescriptive and impose changes on an existing and active testamentary trust of the late B and must accept the provisions thereof. It is also important that the trustees have the right to accept and receive the bequest.

Unconditional bequests are transferred and handed to the trustees of testator B’s testamentary trust by the executor of testator A and are administered in accordance with the provisions of the will of that trust. If the bequests are subject to, for example, the payment of a bequest price, the trustees will be given possession of the bequests once that price has been paid.

There may be more than one active trust in terms of the same will of the late B, with different provisions and beneficiaries. Testator A must therefore stipulate very clearly to which existing active trust of the late B such bequest is to be made.

The same principles as in 1 and 2 above can be applied to a bequest to an existing testamentary trust of the late B subject to a limited right, such as a usufruct in favour of the surviving spouse of testator A. If the trust of the late B is terminated prior to the termination of the usufruct, the capital beneficiaries will also be replaced as the bare owners.


General comments

As far as bequests to existing testamentary trusts (“the late B”) are concerned, it is recommended that the testator (“A”) should rather have the bequest held in trust and administered by the trust created in his own will.

A trust may not be misused to temporarily keep other assets and funds in it for other purposes, with own fixed rules.

Source: Sanlam Trust, No 3/2009- Nov 2009

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