Trusts are regulated by the Trust Property Control Act No. 57 of 1988 (“Trust Property Control Act”) and are defined as the arrangement through which the ownership in property of one person is, by virtue of a trust instrument, bequeathed:

  1. to the trustee to be administered or disposed of for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object of the trust instrument; or
  2. to the beneficiaries designated in the trust instrument which property is placed in the control of the trustee to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument.

This definition does not include the administration of property of another in terms of the Administration of Estates Act No. 66 of 1965.

Types of trusts:

There are two main types of trusts, a mortis causa (testamentary) trust created by virtue of a person’s valid last will and testament and an inter vivos trust (living trust) created between living persons.

An inter vivos trust can be created for the purpose of advancing a company’s broad-based black economic empowerment (“B-BBEE”) rating.

Level of contribution:

Section 7 of GN 112 of 09 February 2007 and GN 1325, the amended FSC series FS100: Measurement of the Ownership Element of B-BBEE, Statement FS100: The General Principles for Measuring Ownership of the codes of good practice of 01 December 2017 (“Codes of Good Practice”) issued by the minister of trade and industry in terms of section 9(1) of the B-BBEE Act No.  53 of 2003, state that black participants in a trust holding rights of ownership in a measured entity may contribute:

  1. A maximum of 40% (fourty percent) of the total points on the ownership scorecard of the measured entity if the trust meets the qualification criteria set out in annexe 100(B) of the Codes of Good Practice; and
  2. 100% (one hundred percent) of the total points on the ownership scorecard if the measured entity meets the additional qualifying criteria set out in Annexe 100(B) of the Codes of Good Practice.

The qualification criteria:

In order for a trust to qualify for recognition in terms of Annexe 100(B) of the Codes of Good Practice the following criteria must be met:

  1. the trust deed must define the beneficiaries and the proportion of their entitlement to receive distributions;
  2. a written record of the names of the beneficiaries or the use of a defined class of natural persons satisfies the requirement for identification;
  3. a written record of fixed percentages of entitlement or the use of a formula for calculating entitlement satisfies the need for defining proportion of benefit;
  4. the trustees do not have a discretion with regards to the terms mentioned in the above points; and
  5. all accumulated economic interest is transferred to the beneficiaries or to an entity representing the interest of the participants or class of beneficiaries.

In order for a family trust to qualify for recognition in terms of Annexe 100(B) of the Codes of Good Practice only the trustees have a discretion with regards to the terms mentioned in points 1, 2 and 3 above.

Meeting the above requirements only provides the measured entity a maximum of 40% of the total points on the ownership scorecard.

Additional qualifying criteria:

In order to obtain 100% (one hundred percent) of the total points on the ownership scorecard the measured entity must, in addition to the abovementioned qualification criteria, be in possession of a certificate issued by a competent person which states that:

  1. the trust was created for a legitimate commercial reason, which must be fully disclosed; and
  2. the terms of the trust do not directly or indirectly seek to circumvent the provisions of the Codes of Good Practice and the B-BBEE Act.

Schedule 2 (two) of Statement 000: General Principles issued in terms of section 9 of the B-BBEE Act, defines a competent person as “a person who has acquired through training, qualification and experience the knowledge and skills necessary for undertaking any task assigned to them under the codes”.

Conclusion:

An inter vivos trust is a useful instrument in order to advance a company’s B-BBEE rating. In order to realise the trust’s full potential and ensure 100% of the total points on the ownership scorecard are awarded to the registered entity as provided for in terms of the B-BBEE Codes of Good Practice, both the qualification criteria as well as the additional criteria, which requires a certificate fundamentally stating that the trust was not created solely for the purpose of fronting, must be met.

15 April 2019