A Trust is created in terms of the deed of Trust, known as a stipulatio alteri, i.e. a contract for the benefit of another. The trustees manage the Trust's assets, which have been provided by the donor or settlor, for the benefit of the beneficiaries
By deed of Trust, we mean the document governing the creation of the Trust, and sets out determining how Trust assets are controlled and treated, the powers of trustees, who the beneficiaries are, and general trust administration requirements.
Here are the main parties to a Trust:
• The settlor or donor: This person establishes and sometimes funds the Trust;
• The trustees: These are the 'managers' of the trust. They are in charge of managing the assets in terms of the express provisions of the deed of Trust; and
• Beneficiaries: The people who benefit from the Trust objectives.
These are the four types of Trusts in use today
1. Special Trust (Type A): A trust created only for the benefit of someone who suffers from any 'mental illness' as defined in section 1 of the Mental Health Act, 1973 (Act No. 18 of 1973); or any serious physical disability. For income tax purposes, such a Trust is treated as a 'special Trust (type A)'.
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2. Testamentary Trust (Special Trust Type B): When a person who's made a legally valid will dies, a trust is created in terms of his last will and testament. For income tax purposes, such a Trust is treated as a 'special Trust (type B)' where the youngest beneficiary is younger than 21 years old on the last day of a tax year.
You should know that assets transferred to a testamentary trust at the death of the testator will result in a deemed disposal of the assets concerned at their market value. This will be the base cost of the assets acquired by the Trust when calculating the capital gain or loss on the subsequent disposal of these assets.
3. Inter vivos Trust: A Trust created 'among friends' during the lifetime of the creator of the Trust. The most common way of funding inter vivos Trusts is through lending money. This doesn't trigger capital gains tax
4. Business Trust: A trust used as a vehicle for conducting a trade or business. For example, a Trust holds a rental property and derives rental income from tenants. 'Trade' and 'Business' are one and the same. You must also distinguish between vesting and discretionary Trusts. A vesting Trust is where some or all of the beneficiaries have absolute rights to either income, capital or to both. They don't own the income or capital, but have a right to claim the delivery of the income or capital.
A discretionary Trust is where trustees are able to decide if one or more of the beneficiaries will receive income or capital or both, from the Trust. In terms of South African law, the beneficiaries enjoy no more than a hope of benefiting from the Trust; they have no entitlement to the income or capital of the Trust until such time as the income or capital vests in the beneficiary.