What is a Trust?

Quite often, I get asked the question “what is a trust?” And the exchange goes something like this: 

What is a trust?

A trust is an agreement. 

That’s all?

Well in a trust, a founder agrees to entrust property to trustees for the benefit of beneficiaries. It’s pretty self-explanatory. 

Aren’t you facetious.

To be fair there’s much more to it. Unlike a company, a trust has no legal personality. It is often referred to as a living document. In this respect, it is similar to a will. Whereas in a will the person making the will stipulates what will happen to his property after he dies, in a trust deed, the founder stipulates how property must be used by the trustees for the benefit of the beneficiaries. 

Furthermore, there are generally three types of trusts, being: inter vivos trusts, mortis causa trusts, and foreign trusts. An inter vivos trust is a trust formed while the founder is alive. A mortis causa trust is a trust formed in the will of a deceased, and a foreign trust is a trust operating in South Africa but formed in a land far far away. 

Trusts are governed by the Trust Property Control Act 57 of 1988, in terms of which a trust is formed by lodging a deed of trust with the Master of the High Court. The deed of trust is the written agreement between the founder and trustees to act for the benefit of the beneficiaries. Therefore, there are always three parties to the trust: the founder, trustees, and beneficiaries. They may even all be the same person or related to each other, but this renders the trust susceptible to scrutiny by the courts which may make an order to ‘peel back the veneer of the trust’ (bad news for you). If the parties are related to each other, as in the case of family trusts, the Master of the High Court usually requires at least one independent trustee. 

If the Master of the High Court is satisfied, he will issue letters of authority to the trustees which is basically a piece of paper empowering the trustees to act on behalf of the trust. That is, once you have a letter of authority stating that you are the trustee of a certain trust, you can pop down to your nearest bank and open an account in the name of the trust. 

So, what are the benefits of a trust? 

Well for one, assets of the trust are regarded as separate from the assets of the trustee. That means a trustee cannot be held personally liable for the debts of the trust, they can only be held liable in their capacity as trustee. Furthermore, similar to the perpetual succession of companies, a trust can exist and operate indefinitely. 

People usually assume that there are lots of tax benefits to trusts, unfortunately this isn’t the case per se. Furthermore, in recent times, trustees are now obligated to disclose who is the ultimate beneficial owner of trust property. 

The main benefit of a trust is its near infinite flexibility. Whatever may be agreed upon in terms of the law of contract, can be agreed upon in a trust deed to suit your needs.