Using a trust to hold your investments

Zubeidha asks: I want to take up the offer in MTN Zakhele along with my business partners. We have decided to create a trust in which we’d make monthly contributions and buy some of these shares and later move on to other investments.

Legally trusts are not well regulated and there is a huge risk of partners making bad business decisions and there are also administration costs - so is this a good option?

Maya replies:
In terms of the actual investment, Rashaad Tayob of Aeon Investment Management sent out a note recommending an investment in MTN Zakhele for eligible black investors. His comments were as follows: The value of the MTN Zakhele transaction is derived primarily from three factors:

  • The donation of R1,294-billion by MTN to Zakhele, equivalent to R16 per Zakhele Share.

  • The discounted transaction price of R107,44, which is currently lower than the MTN share price of R120 (as at September 3 2010)

  • The benefit of leveraged exposure to MTN, without the potential harmful effects—Zakhele investors need contribute only 20% of the funding required to purchase the MTN shares.
The structure of the deal means that there is a large potential upside for the Zakhele investor in the case of a rising MTN share price, while the potential downside is limited to the initial investment.
This makes an investment in Zakhele very attractive on a risk/return basis.

Tayob warns however that investors should be aware of the liquidity risk of the investment, as Zakhele shares cannot be sold during the minimum investment period of three years, and restricted trading will apply for a further three years.

In terms of the decision of whether or not to use a trust, Chanel Kempff, a fiduciary specialist at FNB Private Clients, made the following recommendations: When considering the use of a trust in a BEE share offering scheme, it is imperative that the requirements regarding trusts as stipulated in the prospectus are met.

With reference to previous schemes of this nature and the requirements when trusts were involved, it is important to mention that a normal discretionary trust may not suffice.

The scheme may require specific definitions and clauses to be included in the trust deed such as beneficiaries to be defined to only consist of a certain ethnical group, provisions that a written record should be kept on the names of the beneficiaries or a defined class of natural persons, the proportions of the beneficiaries’ entitlement to receive distributions should be defined, a clause stipulating that the trustees may have no discretion in respect of the identity of the beneficiaries or the proportions in which they may benefit from the trust to be included, etc.

It could furthermore be required that a verification agency issue a certificate to verify that the trust complies with the requirements as per the prospectus.

If used and managed correctly, a trust is a very useful estate planning tool that could offer a range of benefits to the planner (and his family) i.e. protection of assets, protection of interest of minor children, ensure continuity for the future generations and in some cases even tax and cost savings.

The trust is therefore used as an entity to accumulate and preserve wealth for the benefit of the planner and his family. Due to obvious reasons, it is not advisable that the reader and his partners use the same trust as a vehicle to accumulate assets to eventually serve different families or different designated groups of beneficiaries.

Should the reader and his partners still wish to use one vehicle, it is recommended that they seek the advice of a professional that specialises in trust law to assist them. Factors such as the entitlement of the various beneficiaries of the trust against the contributions made by the reader and his partners, powers regarding decision making and voting should be considered and be addressed in the appropriate way in the trust deed.

It is also worth mentioning that, should the reader or his partner wish to acquire assets in trust that should only be for the benefit of one of them (or their designated beneficiaries), they will have to create another trust for that purpose.

From a tax perspective it is important to first consider the requirements as set out in the prospectus, as that will dictate whether the vesting of assets are required—therefore, whether the trust will have to be a vesting trust (also known as a bewind trust) or a discretionary trust. A vesting trust and a discretionary trust are treated differently for tax purposes. 

In terms of the reader’s concerns that trusts are not well regulated and concerns of administration costs, from a statutory point of view trusts are regulated by the Trust Property Control Act 57of 1988. The trust is also seen as a “creature of document”.

This means that the trust deed sets-out the scope of the trust activities and the powers and the responsibilities of the trustees. There are also a slew of court cases that set precedent on trust matters.

With regard to costs it is important to mention that a trust does not have to be audited annually, only a set of books are required. Therefore no audit fees are necessary as in the case of a company.

It is generally advisable to have an independent trustee in office. Most professional independent trustees will charge an annual trustee fee which can be a fixed amount or a fee based on a percentage of the trust assets.

At FNB Private Clients, we have fiduciary specialists who are extremely knowledgeable with trust law and have been involved in the establishment of trusts as well as BEE trusts in similar schemes.

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