Deceased Estate Administration, Wills and Trusts

 

 

Yes, terminating a trust can trigger tax consequences. The distribution of assets from the trust to beneficiaries is often considered a disposal for Capital Gains Tax (CGT) purposes, and any CGT liability must be settled before the trust's affairs can be finalised. The trust must also ensure all income tax and other tax obligations are up to date before deregistration with SARS.
 

A trust does not automatically terminate simply because it is dormant or inactive. Even if a trust has no assets or activity, it legally continues to exist until it is formally terminated on one of the recognised grounds and subsequently deregistered with the Master and SARS. It is advisable to formally terminate and deregister a dormant trust to avoid ongoing administrative burdens and potential risks.

The Trust Property Control Act 57 of 1988 governs the control of trust property and the conduct of trustees but does not provide a detailed statutory process specifically for the termination of a trust. Termination is largely guided by the common law and the provisions of the individual trust deed. However, the Act is relevant in the subsequent deregistration process with the Master.

A trust can be terminated based on several grounds, including:

  • As stipulated in the trust deed (e.g., on a specific date, the occurrence of an event, or at the discretion of the trustees if the deed allows).
  • When the original objectives for which the trust was created have been fulfilled.
  • If it becomes impossible to achieve the trust's stated objectives.
  • By order of the High Court under certain circumstances (e.g., if the trust is detrimental to beneficiaries' interests or its purpose is frustrated).
  • By operation of law, such as the failure of all beneficiaries or the destruction of the trust property.

In terms of Section 17 of the Trust Property Control Act, trustees must retain all documents serving as proof of the investment, safe custody, control, administration, alienation, or distribution of trust property for a period of five years from the date of the trust's termination, unless the Master provides written consent to destroy them sooner.

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Trust Termination 

Terminating a Trust  - A Comprehensive Guide

While trusts offer significant benefits for estate planning, asset protection, and ensuring the smooth transfer of wealth across generations, there may come a time when a trust needs to be terminated. The process of terminating a trust in South Africa is governed by the Trust Property Control Act 57 of 1988, common law principles, and crucially, the specific provisions of the trust deed itself.

Termination is the legal process by which a trust ceases to exist, and it is distinct from the administrative step of deregistering the trust with the Master of the High Court and the South African Revenue Service (SARS).
 

Trust Termination in South Africa is a legal process where a trust is brought to an end in accordance with the provisions of its trust deed, relevant legislation, common law principles, or a court order, signifying the cessation of the trustees' administration of the trust property for the benefit of the beneficiaries.

 Why Terminate a Trust?

There are various reasons why the termination of a trust might be necessary or desirable. These can include:

  • The trust's initial purpose has been fulfilled.
  • The trust is no longer needed or is uneconomical to maintain.
  • Changes in the circumstances of the beneficiaries or the trust property.
  • As a planned event stipulated in the trust deed.

Grounds for Trust Termination in South Africa

A trust can be terminated under several circumstances:

  1. As Defined in the Trust Deed The trust instrument is the primary document outlining the life span of the trust. It may specify a fixed date for termination, link termination to a particular event (such as the death of a specific person or a beneficiary reaching a certain age), or grant the trustees discretion to terminate the trust under defined conditions.
  2. Fulfillment of the Trust's Purpose If the objectives for which the trust was established have been fully achieved, the trust can be terminated.
  3. Impossibility of Achieving the Trust's Purpose If it becomes legally or practically impossible to carry out the trust's intended purpose, this can be a ground for termination.
  4. Failure of the Beneficiary If the designated beneficiaries cease to exist or cannot be ascertained, the trust may terminate.
  5. Renunciation by the Beneficiary While complex and depending on the trust deed and the nature of the beneficiary's interest, a beneficiary may, in certain circumstances, renounce their rights, which could potentially lead to termination if they are the sole beneficiary or their renunciation impacts the trust's core function.
  6. Destruction of Trust Property If the entire trust property is destroyed and there are no prospects of acquiring replacement assets, the trust may terminate.
  7. Operation of a Resolutive Condition The trust deed might contain a resolutive condition, the fulfillment of which automatically triggers the termination of the trust.
  8. By Court Order The High Court has the power to order the termination of a trust, for example, if the trust's provisions are contrary to public policy, jeopardise the interests of the beneficiaries, or if circumstances arise that the founder did not contemplate and which frustrate the trust's objectives (as per Section 13 of the Trust Property Control Act).

The Process of Termination and Deregistration

Terminating and deregistering a trust involves a series of crucial steps to ensure compliance with legal requirements and the proper winding up of the trust's affairs:

  • Review the Trust Deed The first step is always to carefully examine the trust deed and any amendments to understand the specific provisions regarding termination and the distribution of assets.
  • Settle All Obligations Before any distribution to beneficiaries can occur, the trustees must ensure that all the trust's financial obligations are settled. This includes paying any outstanding taxes (including Capital Gains Tax triggered by the distribution of assets), debts, and liabilities.
  • Obtain Tax Clearances Necessary tax clearances from SARS must be obtained.
  • Distribute Trust Assets The trust assets must be formally distributed to the beneficiaries strictly in accordance with the provisions of the trust deed.
  • Obtain Beneficiary Consent/Proof of Benefit Trustees must ensure that beneficiaries have received their entitled benefits or, where applicable and legally permissible, have provided consent for the termination and deregistration. The Master of the High Court generally prefers beneficiary participation in termination decisions.
  • Prepare a Final Statement of Administration Trustees should prepare a final account detailing all income, expenditure, and the distribution of assets.
  • Apply for Deregistration with the Master of the High Court While the Trust Property Control Act does not explicitly detail the process for deregistration, the Master's office undertakes this administrative action to close the trust file. A written application is required, supported by specific documents.
  • Deregister with SARS If the trust was registered for income tax or VAT, it must be formally deregistered with SARS.

Documentation Required by the Master of the High Court

To process the deregistration, the Master's office typically requires the following documents:

  • An original signed resolution by the trustees confirming the termination of the trust, stating whether it was dormant or active, confirming the distribution of all assets, and the closure of any trust bank account.
  • The original Letters of Authority issued by the Master.
  • Bank statements showing a nil balance or confirmation from the bank that the account has been closed.
  • Proof that the beneficiaries have received their benefits.
  • An affidavit from the trustees confirming that all trust assets have been divested.

Key Considerations

  • The Trust Deed is Paramount - Always refer to the trust deed as the primary guide for termination procedures.
  • Record Keeping - In terms of Section 17 of the Trust Property Control Act, trustees are required to retain all documents related to the trust's administration for a period of five years from the date of termination.
  • Tax Implications - Be aware that the distribution of trust assets upon termination can have tax consequences, particularly regarding Capital Gains Tax.

The Right Way to End a Trust - Let VDM Attorneys Assist

Terminating a trust involves navigating legal requirements and administrative processes that can be complex. Our experienced team at VDM Attorneys can provide expert guidance and assistance throughout the entire termination and deregistration process, ensuring compliance with the Trust Property Control Act, common law, and the specific terms of your trust deed. We can help you:

  • Interpret the termination provisions in your trust deed.
  • Advise on the legal grounds for termination.
  • Guide you through the process of settling liabilities and distributing assets.
  • Prepare and submit the necessary documentation to the Master of the High Court and SARS.
  • Address any complications or legal challenges that may arise.

If you are considering terminating a trust, it is essential to seek professional legal advice to ensure the process is handled correctly and efficiently.

Contact VDM Attorneys today for assistance with your trust termination needs.