When establishing your business, you might find yourself thinking of ways to create a vehicle that will offer you continuity and protect your business interests to benefit multiple generations to follow.
This legal insight will focus mainly on how business owners are able to secure generational wealth using business trusts. To understand the benefits that a trust can offer you, you need to firstly understand the nature of the trust, the duties of trustees and the rights of the trust beneficiaries.
Business trust: a brief background?
The Trust Property Control Act 57 of 1988 (“The Act”) defines a “trust” as “the arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed to any person … to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person…”. There are two known trusts in South Africa, namely, inter vivos trust, which is formed during the lifetime of a person and a testamentary trust which is created in terms of a will and only comes into existence upon the death of the testator.
Essentially, a trust is an accumulation of assets, being either movable or immovable property, contingent interests in property and funds held for the benefit of another person. The South African position on trusts is highly unregulated and although the main statute that governs the South African law of trusts is the Act, it mainly deals with the administration of trusts. A business trust in particular would also be governed by certain provisions of the Income Tax Act 58 of 1962 and the Companies Act 71 of 2008.
Trusts can be described according to the purpose for which they were formed. In this instance, a business trust would be formed for the purpose of carrying on a business with an incentive to make profit hence the term “Business Trust”.
By its nature, a trust is created for the benefit of certain persons known as “beneficiaries”. Accordingly, when a trust is created, the founder has the freedom to elect who benefits from the trust property and sets out their benefits in the trust instrument.
Who operates and administers a trust?
A trust is operated and administered by its trustees. In this respect, a trustee is defined in the Act as “any person (including the founder of a trust) who acts as trustee by virtue of an authorization…”. In essence the trustees hold the trust as directed in terms of the Trust Instrument, and for the benefit of the beneficiaries. One thing to remember is that unlike a company (private or public) a Business Trust is not a juristic person and does not have the legal capacity that a normal business would have. A trust by itself cannot own property sue or be sued in its own name. Any property held in trust is held by trustees in their official capacity. Similarly, any proceedings instituted by or against a trust must be by or against the trustees at the time of litigation.
Accountability of a trust and trustees.
You might ask yourself “if a trust has no legal personality, how is it held accountable?”
As mentioned above, trustees in their official capacity can be sued or sue on behalf of a trust, this means that in as much as a trust itself does not have a separate legal personality, through its trustees, it may be held accountable for not acting in line with its trust objectives.
Trustees operate and act only as the trust instruments permits them to. They have a legal duty to act in the best interest of the trust beneficiaries and to fulfill their duties in terms of the Trust Instrument and law. Furthermore, trustees may be held accountable by the trust beneficiaries or any interested party that has suffered a loss as a result of breaching their obligations, acting negligently or for their intentional wrongful acts.
How do I protect my wealth using a business trust?
Since a business trust can be operated as such, a business, one can use the trust for various legal business ventures, with the sole intention of making a profit. The trust instrument will then set out how the operations of such a business should protect and benefit the trust beneficiaries.
Amongst many advantages of operating a business trust is the fact that the administration is less complex and less expensive than that of a company.
If a business trust is administered by trustees that have the knowledge and understanding of all the key elements of operating a business trust, then such a trust will guarantee continuity for multiple generations and will also offer additional protection against creditors and matrimonial disputes, and further protect your accumulated assets from being squandered, giving you a good chance at securing generational wealth as a business owner.
Manopi Makwela – Associate