Termination of a trust and the consequences thereof:

When creating an inter vivos discretionary Trust the intention is that the Trust will exist in perpetuity for generations to follow. However in the event that the objective and purpose of the Trust is no longer capable of being achieved or the termination date has come about, then the Trustees may terminate the Trust. The Trustees will remain in office on the board of Trustees with all the powers granted to them in the Trust Deed until such time as the final distributions have been effected and the winding up process has been finalised.

Prior to termination of the Trust, the Trust Assets or funds in the Trust, or the proceeds of those assets (in each case after payment of all the Trusts liabilities or the assumption thereof by the beneficiaries as the Trustees and the beneficiaries shall agree upon) shall be distributed to the beneficiaries in proportion to their interest as the Trustees shall direct.

If you are the Founder of the Trust being terminated you are able to transfer property held by the Trust back into your own name and to a descendant up to the third generation (e.g. your son and grandson and great grandson) without paying transfer duty (section 9(4) of the Transfer Duty Act read with the definition of relative as defines in the Estate Duty Act).  If you are not the Founder section 9(4) can then not be utilised and unbundling on termination can become a very costly exercise.

Any property, asset or funds distributed to a beneficiary in the course of terminating the Trust will now become the property of that beneficiary. Where there has been any capital growth, Capital Gains Tax will become due and payable.

The South African Revenue Services will have to be notified of the termination of the Trust and all tax returns and liabilities must be finalised.

As the beneficiary is now vested with the ownership of the property, asset or funds, these will form part of that beneficiary’s estate and are open to the following factors:

•    Open to creditors as the Asset Protection aspect of a Trust is lost-
–    Divorce [e.g. during settlement negotiations the assets may be sold or you may be forced to part with assets which you did not intend to].
–    Business creditors [ e.g. unpaid rental agreements, suppliers, staff, the South African Revenue Services, loans, overdrafts and the like].
–    General creditors [e.g. creditors who could lay claim to your assets if you can not pay your debts].
–    Claims [e.g. claim for damages]
–    Sureties [If you have signed a surety for any person or your own business you are exposed to that claim if it is not settled].

•   Estate duty - all classes of property and assets and all forms of rights to property, policies, annuities, investments and business will be included to determine the value of your deceased estate. The tax is levied at a rate of
26.6 % of the value of any assets you have in excess of 3.5 million, after certain deductions have been made.

•    Capital Gains – This tax will be deemed to have been triggered on your death and 13.3% will be payable on all capital growth, even though no money has changed hands or been received.

•    Executor’s fees – An executor is entitled to a maximum fee of 3.5 % of the gross (excluding liabilities etc) value of the estate plus VAT.

•    Protection of minors - Unless adequate provision has been made in a will (by Testamentary Trust), all the assets will be liquidated and the cash paid to the Guardians Fund on behalf of the minors. This fund is controlled by Government, and accrues nominal interest. In the event monies are not claimed, they are forfeited to the state.
It is thus clear that the consequences of termination of a Trust are not advantageous as the beneficiary is once more vested with ownership of the assets. The benefits of Asset Protection and Estate Planning (no CGT, Estate Duty or Executors Fees) afforded by a Trust are lost. It is our advice that you consider these factors before terminating a Trust.