How beneficiaries are defined in the trust deed should be conducive to the purpose of the trust. The choice should be in line with your familial circumstances and your estate plan. It is important to know that only a beneficiary can benefit from a trust, no one else. However, be careful of wildly adding beneficiaries in the trust instrument, as this can give them rights even if it is a discretionary trust.
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Define beneficiaries clearly
It is worth noting that without an object that is clearly defined, a trust will not come into existence. In the case of a family trust, the object is those who benefit from the creation of the trust, the beneficiaries. When deciding who benefits from the trust it is important that you define the beneficiaries clearly.
Ensuring that in the trust instrument the description of the beneficiaries identifies them (by legal name) or makes it possible to identify them, by clearly defining a class of beneficiaries (like your descendants).
Consider possible future changes for beneficiaries
Keep in mind that once a beneficiary receives any of the distributions from the trust (or submits their acceptance of benefits to the trustees in writing), revoking their status as a beneficiary of the trust is not an easy process.
You will require their consent to do this. Adding or substituting beneficiaries (in a discretionary trust) at later times may trigger Transfer Duty if the residential property is held in the trust (Section 1 of the Transfer Duty Act).
Also read: How to register a trust in South Africa.
As no definition for a “residential property trust” exists, the provisions apply to any trust-owning residential property, regardless of the proportion the property is of the total value of assets held in the trust. In this instance the Transfer Duty is based on the residential properties’ full market value, regardless of the interest, the person acquires in the trust.
Therefore it is vital to consider and include all relevant beneficiaries from the start. Additionally, be careful of chopping and changing beneficiaries as it may alter the objective of the trust, thereby creating a new trust which will have adverse tax consequences.
Be aware of what beneficiaries can do with their rights
It is vital to keep in mind that a beneficiary can give up their rights, as well as cede both a vested and discretionary right to another entity or person. One should be conscious of the consequences and may want to expressly forbid such a cession in terms of the trust instrument.
Practicality considerations for the powers of decision-making in the trust instrument
Ensuring that the meaning of the term “beneficiaries” matches its intended meaning in certain clauses is important. Especially clauses dealing with things like appointing trustees or amendment of the trust instrument.
For example, should the term “beneficiary” be defined in the trust instrument to include “all persons related by blood or affinity to the founder” and, the agreement of all beneficiaries is required to appoint a trustee or make changes to the trust instrument?
It could become a laborious and tedious task to track and involve all those persons in such an appointment or change. Therefore the founder should exercise practicality in the consideration of these clauses in the trust instrument.
Conclusion
People often do not pay enough attention to the consequential and meaningful beneficiary clause in the trust deed. Often accepting a ready-made trust deed that does not reflect and provide for the circumstances of the family.
This may cost them a great deal. Estate planners are advised to review an existing trust deed set up by them, to make sure that it is in line with their wishes.
Subject to the terms of the trust deed, and the above considerations, it may be (and should perhaps be) amended. It is advisable to seek help from a professional who specialises in trust services.
Last updated 7 March 2023.