Trusts and Firearms

John Welch

In South Africa trusts are dealt with by the Trust Property Act, No. 57 of 1988, the common law and even, to some extent by English law. In principle two types of trust exist, an inter vivos or living trust and a testamentary or post death trust. The main difference between the two types of trust is that with a living trust the trust property does not form part of the owner’s estate, whereas with a testamentary trust it does. With a living trust the property is transferred from the owner to the trust during his life, and for this there must be a properly registered trust deed, while with a testamentary trust, which must be incorporated in a valid will, it remains his property until he dies where after a trust must be created in accordance with his will.

Both movable and immovable property can go into any trust. Where property is transferred to a living trust the legal formalities need to be complied with, for instance, transfer of ownership of the house or farm can only go to the trust through the deeds office and, where necessary, by paying transfer duty. Such property could be sold or donated to the trust, however, if donated, SARS will tax it. If sold, it could be done against a loan, however, there must be a loan agreement otherwise SARS will regard it as a donation. There must be a date of payment for the loan, however the interest needs not be specified. The benefit of a living trust is that at the death of the deceased, estate duty is not payable on the value of the property belonging to the trust. A contrario, where the property belongs to the owner and he makes provision for a testamentary trust, the property forms part of his estate, hence estate duty is payable on the value (obviously only if the value of the estate exceeds the limitation (R3.5m)) of the estate property. Probably the main reason for a testamentary trust is to provide for minor children. In such a way the children are certain the property will not be squandered and they will be maintained. Generally, this could be achieved by means of a living trust too, however, not all people are comfortable with property not belonging to themselves. In both cases the appointment of a competent trustee obviously is vital.

A trust is a legal entity which is created to hold assets for the benefit of certain persons or entities. However, it is not a juristic (legal) person, excepting if so declared by specific laws, such as the Tax Act and the FCA. As such a trust cannot institute legal action neither can it be sued. The trustees act on behalf of the trust and in this capacity can bring and defend actions concerning the trust.

With the view of preserving their firearms for posterity, collectors often ask whether it might not be advisable to transfer their firearms to a so-called family trust. Please note that a family trust is only a living trust. A family trust is created and registered during the life of the owner to ensure that the assets remain in the trust and do not belong to any specific person. However, there must be trustees who must manage the assets in the trust. And in terms of the Firearms Control Act, No. 60 of 2000 (FCA) one such trustee must be competent and be nominated as the responsible person. Section 1 of the FCA defines a 'juristic person' as to include a trust. It draws no distinction between types of trust.

Section 7 of the FCA provides for applications by persons other than natural persons, and reads as follows:

“(1) When a juristic person wishes to apply for a licence, permit or authorisation in terms of this Act, it must nominate a natural person to apply on its behalf.

(2) The person so nominated must be identified on the licence, permit or authorisation as the responsible person.

(3) A responsible person who holds any licence, permit or authorisation issued in terms of this Act pursuant to an application contemplated in subsection (1) on behalf of the juristic person must for purposes of this Act be regarded as the holder of the licence in question.

(4) If it becomes necessary to replace a responsible person for any reason, the juristic person must in writing-

(a) nominate a new responsible person who must be in possession of the relevant competency certificate; and

(b) notify the Registrar of the nomination within seven days from the date of the nomination.

(5) For the purposes of this Act, a juristic person includes a trust, as long as the trust deed-

(a) provides for the possession of firearms, ammunition or muzzle loading firearms by the trust;

(b) clearly the intended purpose of the possession of firearms, ammunition or muzzle loading firearms by the trust; and

(c) that the possession of the firearms, ammunition or muzzle loading firearms by the trust may only endure as long as the possession is necessary to achieve the stated intended purpose.” (my underlining)

Regulation 13 (1) provides for the application for a competency certificate, licence, permit, authorisation, as well as, a duplicate thereof or renewal to be issued for a purpose contemplated in the Act.

Sub regulation (5) specifically deals with applications by a juristic person. It reads as follows:

“(a) the Registrar may require additional information to the information requested on the application form, in respect, of any person who is in control of the juristic person or is responsible for the management thereof;

(b) the application must be accompanied by proof of the registration or incorporation, as the case may be, of the juristic person in accordance with the laws of the Republic of South Africa [in the case of a trust it will be the trust deed or the valid will];

(c) the application must be accompanied by a certified copy of the resolution or decision of the juristic person, nominating the responsible person to apply on its behalf; and

(d) rendering a security service as defined in section 1 of the Private Security Industry Regulation Act, 2001 (Act 56 of 2001), the application must be accompanied by documentary proof of registration with the Private Security Industry Regulatory Authority, contemplated in the Private Security Industry Regulation Act, 2001 (Act 56 of 2001).” [my underlining]

Although it could be argued that firearms could legally be possessed by a living trust, this never seems to have been the intention of the FCA. In this regard section 7 (5) (b), which requires the intended purpose for the possession of the firearms by the trust; and subsection (5) (c), which requires that the trust deed indicates that the possession shall only endure as long as the possession is necessary to achieve the intended purpose, seem to indicate that possession of the firearms by the trust is not in perpetuity. It rather tends to indicate that the FCA intended to apply to a testamentary will, where, at the time of death of the testator (owner of the firearms), the heirs (children) are still minors, hence the firearms need to be protected against alienation. In such a case the firearms will then be transferred to the trust which will keep them until the heirs become of age in which case they could apply for competency certificates and licenses. In such a case a trustee with the required competency certificate must apply for licenses to retain the firearms as trust property.

However, as in all cases of inheritance, heirs may accept or decline the inheritance. Should the heirs decline the inheritance, the trustees, in conjunction with the heirs must decide what to do with the firearms. They may possibly sell them so the heirs could inherit the monetary value thereof.

My opinion, accordingly, despite the FCA referring to trusts as juristic persons, do not rush out and create an inter vivos trust to transfer your firearms to. I believe it will not solve your existing problems (if you have any) and it may just wake up sleeping dogs at the CFR.

To allude to my explanation you may wish to read the article below by Eric Jordaan, placing testamentary trusts in perspective.

The value of testamentary trusts

These trusts can be used to protect and preserve assets bequeathed to minor children, mentally or physically disabled beneficiaries or a surviving spouse.

26 March 2020 09:15 / By Eric Jordaan - Crue Invest (Pty) Ltd

If you have minor children, not making provision for a testamentary trust can lead to problems and unintended consequences after your death. 

A testamentary trust, also sometimes referred to as a will trust, is a commonly used trust when it comes to estate planning. Unlike an inter-vivos trust which comes into existing during the lifetime of the trust founder, a testamentary trust only comes into existence on the death of the testator and can be effectively used to protect and preserve assets bequeathed to minor children, mentally or physically disabled beneficiaries or a surviving spouse.

A testamentary trust is created by including a trust clause in your will which in essence serves the same purpose as a trust deed. Bear in mind, however, that there are certain formalities which must be met for the trust to be created on your passing, so it is advisable to get an estate planning expert to assist you when drafting your will.

Specifically, your will must contain clear evidence that you intend to create a trust, and it must further identify the property or assets which should be moved into the trust. You must also nominate who the beneficiaries of the trust should be to avoid any confusion. Because of the principles applicable to freedom of testation in South Africa, it is very difficult to contest the terms and conditions of a testamentary trust. Importantly, if your will is found to be invalid for whatever reason, the trust will not come into effect and this can have unintended consequences for your beneficiaries and dependents.

Up until the age of 18, children in South Africa are considered to be minors and do not have the legal capacity to enter into agreements or contracts without the assistance of a legal guardian. As such, a testamentary trust is an excellent way to protect the interests of your minor children after you have gone. It can also be used to make financial provision for your spouse or protect an asset such as a holiday home or farm which cannot be divided between your heirs. A testamentary trust can be used to preserve assets that may be squandered by a beneficiary or who may waste his inheritance.

By including a trust clause in your will, you essentially provide the mechanism for the establishment of a testamentary trust upon your death. Your will should also set out the terms and conditions that apply to the testamentary trust, nominate trustees, and provide guidance on how the trust assets should be managed for the benefit of the beneficiaries. In general, however, the terms of a testamentary trust are not as detailed as with an inter-vivos trust. If your will provides for the formation of a testamentary trust for your minor children but at the date of death all your beneficiaries are over the age of 18, the provision will simply be ignored.

As the testator, you will effectively be the founder of the testamentary trust and nominating trustees to manage your trust is an important decision. The trustees have a fiduciary duty to manage the trust assets in the best interests of the beneficiaries and it is not a job to be taken lightly. It is essential to appoint trustees who you trust implicitly to protect the assets for the benefit of your heirs and per your wishes. They should have a sound understanding of finance to ensure that your assets are properly controlled and manage, and that tax efficiency is achieved. You do not need to appoint your child’s legal guardian as a trustee and it is sometimes better to have a separate person filling the role of trustee.

Upon your death, your appointed trustees must apply to the Master of the High Court for letters of authority which will allow them to set up and manage the trust as per your instructions. The duration of the testamentary trust will depend on the terms and conditions that you have included in your will. For instance, you may choose for your trust to remain in existence until each beneficiary reaches age 25, after which the trust will terminate. In general, a testamentary trust will terminate once the nominated beneficiary reaches a certain age, after a pre-determined period, or on the death of the income beneficiary. A testamentary trust can own immovable property, receive donations and inherit money from your estate when you die, and is a secure way of ensuring your assets are correctly managed by people you know and trust.

Examples of specific clauses in a will setting out the responsibilities of the trustees include:

To invest cash, the proceeds of assets realised and surplus income, for the benefit of the trust, in any manner and to call up and reinvest such investments, as the trustees may deem fit in his sole discretion, without being restricted to recognised trustees investments.

To, at his sole discretion, provide out of the trust income for the maintenance, education and general benefit of the beneficiaries concerned and for all expenses, obligations and costs in relation to the trust assets and any business ventures which may be conducted and also for necessary and useful improvements, interest and capital repayments and outstanding loans, payment of debts and income- and other taxes and, if the income is insufficient, to pay the shortfall from the capital and to capitalise any income not utilised for the above-mentioned purposes for the benefit of the beneficiaries concerned.

A testamentary trust can qualify as a special trust as long as the youngest of the beneficiaries is under the age of 18 on the last day of the relevant year of assessment. In such a case, the testamentary trust can be registered as a special trust type B. A testamentary trust for the benefit of physically or mentally disabled children can also qualify as a special trust and would be registered as a special trust type B. The rate of income tax applicable to special trusts is the same as for natural persons on a sliding scale relevant to the income brackets, but such a trust must be set up in terms of the Income Tax Act to qualify for this favourable tax rate.

If you have minor children, not making provision for a testamentary trust can lead to problems and unintended consequences after your death. Firstly, in the absence of a testamentary trust, any assets bequeathed to your minor child will be held by the Guardian’s Fund which falls under the administration of the Master of the High Court. These funds are generally invested at below-market interest rates which makes it difficult to ensure adequate capital growth of the assets.

Because assets housed in the Guardian’s Fund are effectively managed by the state, many guardians struggle with red tape and find it difficult to get these funds released timeously for the adequate care of the minor child. In terms of legislation, the Master of the High Court can pay out all interest to the minor child, although this interest is only paid annually; and an overall maximum of R250 000 that can be drawn from the fund until the minor reaches age 18. This means that, if the interest is not sufficient to provide for the needs of the minor child, the guardian is not able to claim more than R250 000 from the fund.

Also important to consider is that only money can be transferred to the Guardian’s Fund. In the case of immovable property bequeathed to a minor child, the property must be registered in the name of the minor and managed by the legal guardian until the child reaches age 18.