The case for creating trusts

Tichawana Nyahuma Legal Matters —
The purpose and functions of trusts are a mystery to many. To properly demystify trusts, it is essential that I first distinguish them from companies, lest there are some who believe that the two animals are the same.

There is a clear distinction between a company and a trust. A company is formed to do certain things whose ultimate aim is profit. Companies are governed by the Companies Act and a host of other laws that relate to their particular fields.

They are managed or run by persons who are constituted into boards of directors and the names of the directors are required, as a matter of law, to be submitted to the Registrar of Companies through the CR14 form. Directors are appointed by company shareholders.

There are many other requirements that a company must fulfil before being issued with a certificate of incorporation to begin operations. The certificate of incorporation is the company’s birth certificate.

In addition, companies are subject to taxation on profits and must submit annual returns to the registrar. They must also notify the registrar of their business address. If the directorship of the company should change, the registrar must also be advised.

The memorandum and articles of association of a company speak to the manner in which it interacts with outsiders as well as within itself. All the information that relates to a registered company is accessible to the public upon payment of a prescribed fee.

Furthermore, a company has perpetual existence unless it is terminated according to law. The process of terminating a company is elaborate and cumbersome and must ultimately be authorised by the High Court.

On the other hand, trusts are formed to administer property/assets for the benefit of third parties, called beneficiaries. A trust comes into being upon the founder, who can also be a beneficiary, appointing trustees. The trustees present themselves before a lawyer, who is also registered as a public notary, and append their signatures to a deed of trust, a process called execution of the deed of trust.

The deed of trust might be equated to the memorandum and articles of association of a company, and the trustees likened to the directors of a company.

The deed of trust may be submitted and registered in the Deeds Office by the Registrar of Deeds but this is not a legal requirement because a trust is created by the mere execution of the trust deed.

The further step of submitting it to the registrar is so that trustees can open bank accounts as financial institutions insist on a document authenticated by the registrar.

Registration of trusts has evolved by practice and not as a matter of law. When the trust is registered with the registrar, there is no document equivalent to a certificate of incorporation issued. The mere authentication of the trust deed is enough.

What the trust can or cannot do is determined by the provisions of that deed of trust. It can buy shares and other assets for the benefit of the beneficiaries. Accordingly, trusts are not all the same.

There is also what is known as a testamentary trust, which is created through a will. It is formed by a person making a will wherein he states that upon his death, he would want a trust to be set up and he appoints an administrator to oversee that process.

The idea will be that the person making the will — the testator — wants to leave assets after his death to a beneficiary but will not want the beneficiary to receive the assets immediately upon his death but until a specified time or after a certain specified event has occurred. This can be the beneficiary attaining a certain age or getting married.

Trustees carry what is called a fiduciary duty towards the beneficiaries. A fiduciary duty is the highest standard of care. This is so for the reason that at the formation of a trust, the founder will donate certain property to it.

In reality, the property will be donated to the trustees in their official capacities, that is to say ownership will reside in the “office” of the trustees and not in their personal names.

It is, therefore, only logical that trustees never betray the trust reposed in them by the law, otherwise fraud will be inferred which may culminate in criminal charges. Once the trust comes into being, there are no further obligations imposed by law on it such as those relating to a company.

Any change in the composition of the board of trustees is simply by a board resolution and there is no legal requirement to advise the registrar. Although a trust normally has a perpetual life span, it can be terminated.

The procedure is by a simple board resolution and the process does not have to be escalated to the High Court as is the case with a company. Should the trust make profits, those gains will be for the benefit of the beneficiaries of the trust. In other words, the profits will be distributed amongst the beneficiaries who are required by law to pay income tax.

The trust is required to pay VAT or other applicable taxes depending on the nature of its transactions. If, for example, the trust acquires a car for one of the beneficiaries, all the taxes chargeable thereon are for the trust’s account as the vehicle remains the property of the trust; but the trustees have to make a resolution to the effect that the vehicle is for use or for the benefit of the said beneficiary.

Accordingly, the beneficiary is not liable to pay those taxes but will simply enjoy use of the vehicle. But what is the position with respect to assets such as the matrimonial home if a spouses decides to register it in the name of a trust?

Once property is transferred to trustees, it follows that the spouses would have divested themselves of that asset. In the event of death of one of the spouses, the property will not fall into the estate of the surviving spouse as it belongs to the trust. Even upon divorce, that property will not be the subject of distribution of the properties of the spouses.

A word of caution though.

If in a case where the matrimonial home was registered in the name of the husband for example, if he transfers the property to a trust in an effort to place that asset out of the reach of the wife because he has been to the mountain top and seen a divorce coming, then the long arm of the divorce court will be able to retrieve it from the trust for the benefit of the spouse.

If, however, the transaction had been done with the full knowledge and consent of the wife, the court will neither see her nor hear her when she cries that she did not give her consent to that transaction.

One might wonder how, if the assets have been transferred to the trust and in the event a beneficiary wishes to use them as security for a loan, such a situation is handled.

The board of trustees will simply pass a resolution authorising the encumbrance of that particular asset for the benefit of that person. The hurdle that must, however, be overcome if one decides to hold his assets in a trust is that the usual costs, such as transfer fees and stamp duty, are still payable.

So if one has several properties already registered in his name or in the names of his companies, it may be very costly to transfer them to a trust.
The easiest way is to deposit the properties into a trust at the time of purchase. Should there be need to sell any of those assets, the trustees simply pass a resolution to that effect.

Trusts are, therefore, a shrewd repository for one’s property. There are tax benefits including a reduced estate duty upon death. I shall discuss matters concerning estate duty on another day. Otherwise on both death and divorce, there are less difficulties.

There are some parents who have bought immovable properties and registered them in the names of their children. While this might look and sound smart on the face of it, several issues might arise.

If the children are minors, the properties cannot be used as security for a loan without the Master of the High Court’s consent. The process of obtaining that consent or authority is long and cumbersome and in any event, the Master does not easily grant permission.

In the event the child in whose name the immovable property is registered is a girl and if she should later get married and then dies, the property will most likely fall into the estate of her husband and the house will effectively be gone – particularly if the husband remarries and he himself subsequently dies.

Where the child is a boy, cases of the house being sold soon after he attains the age of majority are common and parents can do nothing about it.
The best option, therefore, seems to be locking up the assets in a trust.

Tichawana Nyahuma is a lawyer and writes in his personal capacity. Feedack: [email protected]