Why we describe Trust Beneficiaries in a certain way

by Eduan Botha


Beneficaries

“Determined” vs “Determinable”

This is a question we get asked a lot. When completing a trust instruction form, people often do not understand why we choose to name the trust beneficiaries in the way that we do. Common knowledge dictates that you should directly name the people you want to benefit from the trust, right? Well, actually no.

The law requires that beneficiaries should be determined (identified by name) or determinable (identifiable out of a class of beneficiaries). The reason we utilise the second option and make the beneficiaries determinable is threefold:

  • Discretionary Trust vs Vested Right;
  • FICA requirements; and
  • Continuity

We will now look at each one separately.

 

Discretionary Trust vs a Vested Right

If we identify the beneficiaries by name, it creates a vested right in favour of that beneficiary whereby he or she may demand that a benefit be bestowed upon them when due. This does not give the trustees any headroom to decide which beneficiaries may receive a benefit and how much the benefit may total. This will make it inherently difficult when we utilise distributions in order to create our tax saving scenario, as most of you will be aware.

It will further complicate things if you and your brother, for example, have a huge argument where bad faith and -blood is created. When the time comes, he simply demands his distribution and there is nothing you can do about it. In this way, your beneficiaries can eat away at trust capital and -assets, which will really be bad for the ultimate goal of letting trust assets grow.

We much rather prefer a discretionary trust whereby the beneficiaries are determinable. This gives the trustees the power to decide, out of classes of beneficiaries stipulated, who may receive a benefit and who may not. In this instance, beneficiaries do not have a right to receive a distribution, only a hope, and the tax saving scenario can be implemented to the most advantageous structure as well.

 

FICA Requirements

The Financial Intelligence Centre Act requires that the beneficiaries of a trust be FICA'd when the bank account for the trust is opened, if the beneficiaries are determined (identified by name) in the trust deed. This will create a very arduous situation where each and every beneficiary (which could potentially range from parents to siblings and right down to grandchildren) must be present at the bank when the account is opened. This is a logistical nightmare. The same will apply when the trust is registered at SARS. It is just not practically feasible in most cases to have everybody present.

When beneficiaries are identifiable out of a class of beneficiaries, the above mentioned requirements do not come in to play and the process is streamlined. This is simply because you cannot FICA a beneficiary that has not yet been identified, and you can't FICA the whole class of beneficiaries as not all possible beneficiaries in the class may ever receive a benefit. It depends on the discretion of the trustees.

 

Continuity

By having classes of beneficiaries, you are ensuring continuity of the trusts. We can explain this by example: If you name your children by name in the trust deed (instead of naming a class), and you and your children pass away without the deed ever being amended, the trust benefit cannot carry on to future generations. It will continue until all named beneficiaries have passed away – then the trust will possibly dissolve.

Obviously, the trust can be amended after your death, but most times that will not happen as it will dilute the benefit received by the remaining beneficiaries, and if they are also trustees they naturally will not want to consent to a reduction of their benefits.

By rather stipulating a class of beneficiaries, such as “the descendants of person X and Y”, you ensure that the trust has continuity in that it makes provision for the future generations born out of your blood line.

By naming classes of beneficiaries you also have a broader scope for your tax saving structure, and you can more easily help out a family member in need by distributing to them a benefit out of a trust as an identifiable beneficiary without creating a situation whereby they later can demand a benefit because of a vested right.

This explanation has been set out very short and sweet. The explanations and reasoning are, of course, a lot more complex if you delve into the details and the applicable laws. For a detailed and personalised consultation with a Wealth Masters Approved trust advisor, please contact services@wealthmastersclub.com.




 
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