WHAT ARE THE DOWNFALLS OF THE TRUST PROPERTY ACT?

The Trust Property Control Act 57 of 1988 governs the registration, administration, and fiduciary duties of trustees, but the practical downfalls settlors experience flow mostly from how the Act interacts with the Income Tax Act 58 of 1962 — section 7’s deemed-donation rule on interest-free or low-interest loans from a trust to a connected person, the trust income tax rate (set materially higher than most individual marginal rates), and section 25B’s flow-through of vested trust income to beneficiaries. Property held by a trust is taxed at the trust rate on capital gains (the primary-residence exclusion does not pass through to the trust), and assets are not automatically outside the founder’s estate where control was retained under section 3(3)(d) of the Estate Duty Act 45 of 1955, often defeating the planning purpose. Trustees who act without letters of authority from the Master of the High Court, who do not furnish the security required under section 11 of the Act, or who act outside the powers set out in their trust deed expose the founder, the beneficiaries, and the trust itself to liability.

What the Trust Property Control Act 57 of 1988 Actually Does — and Where Its Limits Begin

The Act governs registration of trust deeds, appointment and authorisation of trustees, fiduciary duties, and removal from office. It does not determine the tax consequences that motivate most settlors to set up a trust in the first place. Asset-protection and estate-planning outcomes — where they actually arise — come from the interaction between the trust structure and the Income Tax Act, the Estate Duty Act, and the donations tax regime under sections 54 to 64 of the Income Tax Act.

The downfalls most settlors experience are downfalls of operating a trust under this regime, not of any single provision of the Act. That distinction matters: when people ask about “the downfalls of the Trust Property Act,” the answer is rarely a list of bad clauses in the Act itself. It is a list of bad outcomes produced by running a vanilla family trust without the tax-planning mechanics the surrounding Acts demand.

Tax Downfall 1: Section 7 of the Income Tax Act and Interest-Free Trust Loans

Section 7(3) to (8) of the Income Tax Act 58 of 1962 deems the difference between interest actually charged on a loan from a trust and the official rate of interest to be a donation by the trust to the borrower, where the borrower is a connected person — typically a beneficiary, the founder’s spouse, or a related company. The trust becomes liable for donations tax at the prevailing rate on the deemed donation each year the loan remains outstanding.

The annual donations tax exemption applies to the donor (the trust), not the beneficiary, and is modest in amount. Repeated interest-free “advances” quickly exhaust it. The trap is dispositive for plain-vanilla family trusts that fund beneficiaries with cash from the trust bank account rather than income vested under section 25B.

Tax Downfall 2: The Trust Income Tax Rate vs. the Beneficiary’s Marginal Rate

Income retained in a trust — not vested in a beneficiary under section 25B — is taxed at the trust rate, which is set at or near the top marginal individual rate. Where the same income could have flowed through to a beneficiary who would otherwise be taxed at a lower marginal rate, retaining it in the trust is materially more expensive — sometimes by 20 percentage points or more.

A simple vesting clause in the trust deed is the structural fix. Without it, the trust retains income, the trust rate applies, and the intended tax saving inverts into a tax penalty. Burger Huyser Attorneys’ Wills and Estates and Trusts practice, sitting under the firm’s broader multi-specialist mandate, regularly reviews deeds to confirm that the vesting language is doing the work the settlor assumed it was doing.

Tax Downfall 3: Section 25B Flow-Through — Income vs. Capital Gains

Section 25B of the Income Tax Act 58 of 1962 provides that amounts of “income” vested in a beneficiary are taxed in the beneficiary’s hands at their marginal rate. Capital gains, however, do not flow through to the beneficiary — they remain in the trust and are taxed at the trust rate, regardless of how the trust deed is drafted.

This is the single most common surprise in property-holding trusts. The rental income may be in the beneficiary’s hands at a lower rate, but the gain on sale of the property itself is taxed at the trust rate.

Tax treatment	Vested in beneficiary	Retained in trust
Trust income	Beneficiary’s marginal rate (s25B)	Trust rate
Capital gains on trust assets	Trust rate (no flow-through)	Trust rate
Primary-residence CGT exclusion (para 9B, Eighth Schedule)	Not available — trust is owner for CGT purposes	Not available
Rental income from property	Beneficiary’s marginal rate if vested under s25B	Trust rate

Donations Tax Pitfall: When “Distributions” Are Treated as Donations

A loan or “advance” from a trust to a beneficiary that is never repaid is treated by SARS as a donation by the trust, with the trust as the donor (sections 54 to 64 of the Income Tax Act). Donations tax becomes the trust’s liability, but the trustee who authorised the loan is exposing the trust to penalties and interest in their personal capacity as fiduciary.

Where the intent is genuinely to fund a beneficiary, the clean alternative is a vested section 25B distribution rather than a quasi-loan that drifts into a deemed donation. Where a loan is genuinely intended, it must be documented, bear interest at the official rate, and carry a realistic repayment programme.

Estate Duty Pitfall: Section 3(3)(d) of the Estate Duty Act and the “Controlled Trust”

Section 3(3)(d) of the Estate Duty Act 45 of 1955 includes in the deceased’s estate any property over which the deceased retained a power or interest, alone or jointly with another, that could be exercised for their own benefit. Settlors who retain the right to appoint or remove trustees, to direct distributions in their favour, to revoke the trust, or to use trust assets during their lifetime routinely find that property supposedly “out of the estate” is pulled back into the estate on death.

Pure discretionary trusts where the founder has truly divested control are generally outside the estate — but the trust deed language and the way the trust has actually been operated have to support that outcome, not undercut it. This is the gap between “I put the property in a trust” and “the trust actually keeps the property out of my estate on death”: the second statement only holds where drafting and administration match.

CGT Pitfalls for Property Held by a Trust

Property held by a trust is treated as held by a separate taxpayer. Capital gains on disposal are taxed at the trust rate, even where the founder and beneficiaries would have paid materially less in their own hands. The primary-residence CGT exclusion under paragraph 9B of the Eighth Schedule to the Income Tax Act — the R2 million exclusion for an individual owner’s primary residence — does not pass through to a trust that holds the primary residence; the trust is the owner for CGT purposes and pays tax on the full gain on sale.

Rental income retained in the trust is taxed at the trust rate. If the deed allows the income to vest in a beneficiary who is a lower-rate taxpayer, section 25B can be invoked to draw that income into the beneficiary’s hands instead. This combination — CGT at the trust rate plus the lost primary-residence exclusion — is what makes a family home transferred into a trust frequently a worse CGT outcome than leaving it in the founder’s name.

Trustee Pitfalls Under the Act Itself

The Trust Property Control Act creates several fiduciary traps that operate independently of tax law:

• No letters of authority — section 6 prohibits a trustee from acting in any capacity until the Master of the High Court has issued a Letter of Authority. Acts done before issuance are void or voidable.
• No security — section 11 empowers the Master to require security from a trustee (or every trustee in a board of directors or collective trusteeship scenario) before the trustee may act. Failure to furnish or maintain security exposes the trustee to removal and to personal liability for losses.
• Breach of fiduciary duty — section 9 requires trustees to act jointly, in good faith, with care, skill and diligence, to avoid conflicts of interest, and to keep separate trust property distinct from personal property. Breach is a personal-liability risk.
• Badly drafted trust deed — a deed that omits the powers needed to deal with property (sell, mortgage, lease) traps the trustee into needing deed amendments every time the trust wishes to act. The same deed may also miss the language CGT roll-over relief requires for a property-transfer-into-trust or property-distribution-out-of-trust to work as intended.

Where a Trust Does Not Protect Against Creditors

A trust cannot protect assets from a creditor whose claim arose before the asset was transferred into the trust — such claims attach to the asset regardless of ownership. Where the founder is the sole trustee and sole beneficiary, courts have in multiple decisions “looked through” the trust to enforce claims against the founder, on the ground that the trust is the founder’s alter ego or a sham.

Section 21 of the Tax Administration Act allows SARS to lift the corporate veil in certain tax scenarios, drawing on the trust’s underlying assets and on the trustees personally where tax debts have accrued. The practical mitigation is consistent operational independence: a separate trust bank account, annual financial statements, independent trustees with real powers, current trustee resolutions, and a real, current record of trust activity.

How to Avoid the Downfalls in Practice

1. Commission a proper needs test before settling the trust. Testamentary trusts under the deceased’s will, outright ownership with a valid will, or a company structure often suit better than an inter vivos family trust — and a candid attorney will say so.
2. Document every loan from the trust to a beneficiary at a market-related interest rate, with a written loan agreement signed by both the trustee and the borrower.
3. Keep the trust operative — annual financial statements, regular (at least annual) trustee resolutions, a separate trust bank account, and ongoing activity consistent with the trust’s stated purpose.
4. Review the trust deed with a practitioner every few years, and after any major tax-law change (section 7 deemed-donation amendments, trust rate adjustments, Estate Duty Act amendments).
5. Avoid drafting a trust from a free online template. The deed must integrate properly with the Income Tax Act, the Estate Duty Act, and the Trust Property Control Act for its planning purpose to be achieved.

Trusts and the Trust Property Control Act in Gauteng: Consulting Through the Firm’s Wills and Estates Practice

Frequently Asked Questions

Does the Trust Property Control Act itself contain downfalls, or are these really tax issues?

The Act sets the framework for trust registration, trustee appointment, and fiduciary duties. The day-to-day downfalls settlors experience — section 7 deemed donations on trust loans, the trust income tax rate, section 25B vesting mechanics, estate duty inclusion under section 3(3)(d) of the Estate Duty Act — flow from how the Act’s structure interacts with the Income Tax Act 58 of 1962 and the Estate Duty Act 45 of 1955. From a settlor’s perspective, however, these are downfalls of putting property in a trust under this regime, which is what the question really asks.

What does section 7 of the Income Tax Act do to interest-free trust loans?

Section 7 of the Income Tax Act 58 of 1962 deems the difference between interest charged on a trust loan to a connected person and the official rate of interest to be a donation by the trust. The trust becomes liable for donations tax at the prevailing rate on the deemed donation each year the loan remains outstanding, and the trustee who authorised the loan is exposed personally if the trust cannot pay.

Is property held in a trust safe from estate duty?

Not automatically. Section 3(3)(d) of the Estate Duty Act 45 of 1955 brings property back into the deceased’s estate where the deceased retained a power or interest over it that could be exercised for their own benefit. Whether a particular trust keeps the property out of the estate depends on the trust deed language and on the way the trust has actually been operated during the settlor’s lifetime — not just on the fact of having put the property in.

Can property held in a trust be attached by the founder’s creditors?

It can, in three main scenarios — where the underlying claim arose before the asset was transferred into trust, where the trust is found to be an alter ego or sham of the founder and a court looks through the structure, or where SARS invokes section 21 of the Tax Administration Act against the trust for tax debts. Sound operational practice — a separate trust bank account, real and ongoing activity, current financial statements, and independent trustees — is the practical mitigation.

Is the trust income tax rate really higher than the individual rate?

Yes. Trust income retained in the trust is taxed at the trust rate, which is set higher than the lower individual marginal brackets. Where income could have been vested and taxed in a beneficiary’s hands at a lower rate, retaining it in the trust becomes an inefficient vehicle. Section 25B of the Income Tax Act 58 of 1962 is the mechanism by which vested trust income may flow through to a beneficiary at their marginal rate — capital gains do not flow through and remain in the trust at the trust rate.

Does the primary-residence CGT exclusion apply when the family home is in a trust?

No. The primary-residence CGT exclusion under paragraph 9B of the Eighth Schedule to the Income Tax Act is a personal exclusion for an individual owner of a primary residence; it does not pass through to a trust that owns the property. The trust is treated as the owner for CGT purposes and pays tax on the full gain on sale at the trust rate — frequently a worse CGT outcome than leaving the home in the founder’s own name.

If you are considering setting up a trust, reviewing an existing trust deed after a tax-law change, or facing a section 7 loan query or an estate duty inclusion issue under section 3(3)(d) of the Estate Duty Act, Burger Huyser Attorneys’ Wills and Estates and Trusts practice can advise from the firm’s head office in Linden, Randburg (49 First Avenue, tel 011 888 0246), with the firm’s branches in Roodepoort, Sandton, Pretoria (Menlyn), Bedfordview, Centurion, Alberton, and Midrand all able to take instructions locally. The firm drafts new trust deeds, administers existing trusts, and represents trustees in Master of the High Court processes where Letters of Authority or security are at issue. To speak with a practitioner about your specific situation, contact the Linden office on 011 888 0246 or your nearest branch.