A form of business vehicle which has become increasingly popular. This is due to the advantages it enjoys compared to other business structures, such as the sole proprietorship, the partnership, the company and the close corporation. In the article, we will look at the nature of a business trust and the encompassing essentials of a trust.
Nature of a Business Trust
A business trust is an ownership trust in which the trustees carry out a business-related endeavour as trustees. The trustees own the business and its assets in their capacity as trustees who then carry on the business for the benefit of the trust's beneficiaries.
A business trust may be used for various purposes, for example, for trading or holding property. Further, a business trust can be used to combine a business endeavour with an estate planning goal.
The Essentials of a Trust
To create a valid trust, the following is essential:
The founder can be a legal or natural person. The founder must intend to create trust. This is known as the "substance over form" principle. The intention to create a trust must be expressed in a way which will create an obligation. The trust property must be defined. The trust object must be lawful. A trust without a beneficiary is invalid. The trust will not be successful if the intended beneficiary is not named.
A trustee may not act as such without the written authority of the Master. Care must be taken that what is created is a trust, and it is not constructed as a partnership. A trust and a partnership can closely resemble each other in terms of form; however, in law, they are vastly different from each other, with different consequences.
Flexibility of a Trust
A trust is a very flexible mechanism. A trustee may also be a beneficiary, and the founder of a trust may also be a trustee and a beneficiary. The main restriction of a trust is that the founder may not be the sole trustee or the sole beneficiary.
Rights of Beneficiaries
A beneficiary of a trust may be entitled to all or part of the income and or capital of the trust. The right, which is a personal right, is either conditional or unconditional. The rights of the beneficiaries can be structured in a way that they can be sold.
Who May Be a Beneficiary?
Any person born or unborn, natural or juristic, may be a beneficiary of a trust. The designation is valid when the beneficiary is not a juristic person, for example, a company or another trust. It is possible to have more than one founder of the trust and for the founders to be trustees and beneficiaries.
Who Are Trustees?
The office of trustee is governed by the Trustee Property Control Act 57 of 1988 and common law. There are no prescribed qualifications for trustees; however, the trust deed can disqualify certain persons from acting as same. In a testamentary trust, those who wrote the will or witnessed the will and their spouses are disqualified.1
Further, a trustee must have full contractual capacity.
Section 7 (2) of the Trust Property Control Act2 empowers the Master, if he or she desires, to appoint a co-trustee whom the Master deems fit. A trustee, before assuming control of the trust property and upon payment of the prescribed fee, lodges with the Master the trust testament or a certified copy thereof. A trustee can be removed from the office of the Master or the court. A person can apply for the removal of a trustee, but only if he or she is a beneficiary of the trust.
Advantages and Disadvantages of a Trust
The founder, the trustees and the beneficiaries are not exposed to the creditors of the trust, except in limited circumstances. In this regard, the business trust is in the same position as a company and a close corporation. Like a company and a close corporation, the business trust has the attribute of perpetual succession. This means that a change in trustees or beneficiaries does not affect the continuation of a trust. A business trust enjoys more confidentiality than a close corporation or a company. A business trust provides estate planning opportunities not available with other business vehicles.
However, a trust is treated as a person for tax purposes and is taxed at a higher rate.
In conclusion, business trusts have emerged as a popular and flexible business structure with various advantages over other forms such as sole proprietorships, partnerships, companies, and close corporations. They offer unique opportunities for combining business endeavours with estate planning goals, making them a valuable option for entrepreneurs and investors.
Understanding the nature of a business trust is crucial, as it involves trustees carrying out business-related activities for the benefit of trust beneficiaries. The essentials of a trust, including the founder's intent, well-defined trust property and objects, lawful purposes, and clear beneficiary designations, are fundamental to its validity.
In summary, business trusts offer a versatile and effective way to structure business endeavours and manage assets while achieving specific financial and estate planning objectives. It is essential to seek legal advice and guidance to ensure compliance with relevant laws and regulations when establishing and managing a business trust.
Written by Robyn Shepherd, Attorney, SchoemanLaw