Testamentary reservation allows a trustee to exert control of a trust after their death. But SARS seldom looks kindly on this.
One of the essential elements for the creation of a valid Trust is that the assets held in the trust must be administered separately from the estate of the founder of the trust.
The founder must hand complete control of the trust property over to the Trustees. If the assets are managed in a way that makes them seem to belong to the founder, then the Trust will be regarded as a mere “alter ego” of the founder.
“Substance over form” doctrine
The “substance over form” doctrine allows the courts to ignore the form of a “disguised” transaction in order to examine the true nature of the transaction and thus attach the appropriate legal consequences to it.
South African courts apply this doctrine strictly. If they decide that a founder retains effective control over the trust assets, the trust property will be seen as the personal estate of the founder.
In the matter of SARS v NWK Limited the SCA had no hesitation in declaring the transaction to be a simulation. Delivering the unanimous judgment of the Court, JA Lewis said the following:
“…If the purpose of the transaction is only to achieve an object that allows the evasion of tax, or of a peremptory law, then it will be regarded as simulated. And the mere fact that parties do perform in terms of the contract does not show that it is not simulated: the charade of performance is generally meant to give credence to their simulation.”
Accordingly, JA Wallis JA said: “Whether a particular transaction is a simulated transaction is therefore a question of its genuineness. If it is genuine the court will give effect to it and, if not, the court will give effect to the underlying transaction that it conceals. And whether it is genuine will depend on a consideration of all the facts and circumstances surrounding the transaction.”
What may lead the court to such a conclusion?
The provisions of the trust deed itself may provide sufficient evidence that a founder has not relinquished full control over the trust assets. This is the case where rights and powers are retained by the founder. The testamentary reservation clause is a great example of this.
The “testamentary reservation” is a clause in a trust deed that grants a specific person (usually the founder) the power to determine, in his or her will, certain aspects relating to the trust assets. He or she can determine, for example, the vesting or termination date and/or the formula for the distribution of the trust assets with regard to capital and/or income.
This power allows him or her to reserve a contractual right to unilaterally amend the trust deed by means of a Will. If the testamentary reservation is used incorrectly in a fully discretionary trust, it can result in one beneficiary obtaining rights to the detriment of the other beneficiaries. This will result in the protective nature of the trust falling away and can also result in negative tax implications.
Possible implications of the “testamentary reservation”
Everyone is entitled to structure their affairs in a way that results in maximum taxable benefits. This principle was laid down by Lord Tomlin way back in 1936, when he said that “every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be.”
For many years, trusts have been used as a tax/duty avoidance estate planning tool. But inserting a testamentary reservation clause increases the risk of Section 3(3)(d) of the Estate Duty Act 45 of 1955 being applied.
What is Section 3(3)(d)?
Section 3(3)(d) states that any property that the deceased was, immediately prior to his death, competent to dispose of for his own benefit or for the benefit of his estate, should be seen as property of the deceased.
This means that under certain circumstances, assets which are not the property of the deceased may be subject to estate duty.
The Act further states that a person shall be deemed to have been competent to dispose of any property “if under any deed of donation, settlement, trust, or other disposition made by him he retained the power to revoke or vary the provisions thereof relating to such property”.
If the testamentary reservation compels SARS to apply Section 3(3)(d) to the assets of a trust, the trust assets will be seen as property of the deceased for purposes of estate duty – leaving less for to go around for the heirs.
A word of recommendation
In our experience, it’s not a good idea to make use of a testamentary reservation. If your current trust deed contains one, we’d strongly recommend amending it to prevent Section 3(3)(d) (among others) from finding application. To replace this clause a professionally drafted letter of wishes can be a good way of providing guidance to future trustees.
The team of professionals at Sentinel International is ready to assist you with cleaning up your trust deeds to ensure that your legacy is not compromised.
LLB (Admitted Attorney)
 WT Ramsay V Inland Revenue Commissioners  AC 300.
 SARS v NWK Limited [SCA] 2011]
 Roshcon (Pty) Ltd v Anchor Auto Body Builders CC [SCA] 2014,
 Inland Revenue Commissioners v. Duke of Westminster  AC 1
 Section 3(5) (b) (iii) of the Estate Duty Act 45 of 1955