Renewed interest in umbrella trusts
23 Aug, 2023

Megan Rank, Legal Manager, Fairheads Benefit Services

 

In the early 1990s, Fairheads pioneered the use of umbrella trusts to house death benefits payable to the dependants of deceased retirement fund members. Such was the success of the solution that the industry grew significantly throughout the 1990s and 2000s. As we all know, however, the unscrupulous and scandalous actions of J Arthur Brown resulted in the theft of millions of rands from the Living Hands Trust administered by Fidentia. To this day, the battle to recover these funds rages on with little prospect of success, to the detriment of innocent and vulnerable dependants robbed of their benefits.

 

This sad turn of events led to the demise of the umbrella trust as a solution to house retirement fund death benefits, with umbrella trusts being replaced by a new vehicle, beneficiary funds, which are defined as a pension fund organisation and strongly regulated by the Pension Funds Act. Fairheads was again at the forefront of the development of beneficiary funds; we made input into the legislation and were the first to register a beneficiary fund in December 2008.

 

Beneficiary funds have empowered millions of dependants of deceased retirement fund members and, continue to be a vital piece of the social security puzzle in South Africa.

 

A resurgence of interest in umbrella trusts

 

More recently however, there has been renewed interest in umbrella trusts as a solution to house testamentary money and other benefits for the middle-income market.

 

Trusts became part of South African law after the British occupied the Cape in 1806. South African trust law as we know it today was developed incrementally as a combination of English law, Roman-Dutch law and South African rules.

 

Unfortunately, over the past few decades, the use of trusts to avoid tax became widespread, leading to tax agencies around the world clamping down on them and rendering them disadvantageous in some instances. South Africa is no exception.

 

However, when properly set up and used, a trust remains a powerful estate planning tool, entirely compliant with the regulatory framework governing it in the relevant jurisdiction. It is important to note that the fundamental purpose of a trust is to place assets under the protection of another, on behalf of a beneficiary until some date or condition has been met. Many families choose to use a trust to guide succession and inheritances. There are many different types of trusts, but the most common are vesting or bewind trusts where the assets vest in the beneficiary but are looked after by trustees. The need for these trusts remains but the costs of establishing and maintaining a stand-alone trust can be prohibitive, particularly for smaller estates below R2 million. Compounding the issue of costs are the delays waiting for the Master of the High Court to register the trust deed and issue letters of authority appointing the executor of the estate.

 

Advantages of umbrella trusts

 

So it is no surprise therefore that there has been a renewed interest in umbrella trusts to house benefits due to minor beneficiaries. As the term suggests, an umbrella structure houses various sub-trusts, leading to economies of scale and other advantages which include:

 

  • That there is no need to register a new trust deed, enabling instant liquidity so that settlement can occur quickly and money can flow to the beneficiary;
  • An umbrella trust, founded by a reputable provider, has a professional and experienced board of trustees in place to oversee the best use of the benefits;
  • As mentioned above, the costs are low compared to a stand-alone trust, because these costs are shared by all the beneficiaries of the trust;
  • In best practice, investments are handled at arms length by best-of-breed asset managers, with the board of trustees working together with an investment consultant.

 

Contrast these advantages with establishing a stand-alone trust, which involves the drafting of the deed, appointment of trustees, registration with the Master of the High Court and administering the trust, including all accounting and governance functions – let alone being responsible for the skilful investing of trust funds.

 

So while a stand-alone trust can be tailored to meet very specific objectives, the settlor (the founder of the trust) must understand the costs associated with those objectives and weigh up whether it is truly worth it.

 

How to place funds into an umbrella trust

 

The settlor will make a settlement into the trust by using a deed of settlement to stipulate the conditions upon which the benefit is to be held in trust (for an umbrella trust such as the Fairheads Legacy Trust, the settlor can nominate the vest condition, ie the date or condition upon which the benefit will be paid to the beneficiary, as well as the level of income that should be paid to the beneficiary or their caregiver or guardian for maintenance and upkeep).

 

Alternatively, testators may make provision in their will for a benefit bequeathed to an heir to be placed in a trust setting out the conditions to be satisfied in order for the heir to receive the full benefit. For an umbrella trust it is this provision in a will which allows the executor of the estate to make a settlement into the trust.

 

The above emphasises the need to have a properly executed and up-to-date will. It is extraordinary that the majority of South Africans die without a will which is arguably the most important document of your life, setting out your legacy for the loved ones who you leave behind. If you do not have a valid will, your estate will devolve in a fairly complex manner in terms of the Intestate Succession Act, 1987. If a beneficiary is a minor (younger than 18 years) his/her inheritance will have to be held by the Guardian’s Fund unless a testamentary trust is set up at death for the benefit of the minor child – to be specified in your will. The Guardian’s Fund has recently seen many of its officials suspended due to possible involvement in fraudulent activity.

 

ENDS

 

Author

@Megan Rank
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