Trusts in BEE deals

Many companies use trusts as part of their BEE ownership structures, but these are often abused and as a result the BEE Commission does not react well to structures that include trusts. In this article we explore the origin of trusts, the nature of discretionary trusts (and related problems in terms of BEE ownership requirements), and how Tusker approaches the problem.

How did trusts come about?

Trusts started in the middle ages when the Lord of the Castle was going off to foreign lands to fight a war and still wanted to look after his lands and family.  He asked someone he trusted to look after his castle and wife.  Trust was key because while he was away that person could do everything the Lord was allowed to do – well hopefully not quite everything.  The trustee could decide which serfs could do what, how much to pay them, what to do with the harvest but hopefully not for the trustee’s own benefit and enjoyment (if you know what we mean).

Not everyone liked trusts, even then:

By the time Napoleon came, large parts of Europe were under the control of trustees and he introduced some EWC of his own, pretty much banning trusts in the Napoleonic Code.  That spurred the English to promote trusts even more and even while they were still fighting Napoleon they took over the Cape and introduced trusts to South Africa.

The status and usefulness of trusts:

Centuries later trusts are still used around the world, even though they are under siege again by those pesky Europeans and Americans who don’t like this English idea because of the lack of transparency.

You want to plan a terrorist attack or launder money you could do it a lot easier through a trust than through a company where directors have to be registered with CIPC and you have to play by the rules in a complex Companies Act.  Why not write your own rules (a trust deed), avoid “silly” things like audits and IFRS and decide how to share the profits in a flexible way rather than all the regulation of a formal juristic person like a trust.  Oh and why not have the trust away from all the law as an offshore trust?

While tax authorities and regulators are doing everything possible to make trusts less attractive, people still use them for many reasons – estate planning, protecting against nasty things like insolvencies and divorces.

How trusts work:

Trusts work with someone giving something away (called a donation in trust parlance) so that it doesn’t belong to the Donor (or Founder) when he dies, gets sequestrated or divorced.  And if it doesn’t belong to him it doesn’t get affected by any of these events.

But who does it belong too?  Clearly he doesn’t want it belonging to the taxman, his creditors or his disgruntled ex.  Chances are he still wants to exercise some kind of control and, using a trust, he can even do this after he has gone, because he can spell out how it is to be used in the wording of the trust deed.

Discretionary trusts:

In a discretionary trust the Founder gives the trustee discretion to use it as he sees fit within the rules he has set.  Typically, the Founder sets the rules to say for whose benefit this must be done.  The people for whose benefit the trust is set up are called the Beneficiaries.  E.G. If the Founder says that a trust must be for the benefit of his children (the beneficiaries) after his death but if he gives discretion and there are two children A and B, then the trustee could give them each 50% or one 90% and another 10% or one everything…the system is based on trust but open to abuse by the all-powerful trustees.  All discretionary trusts have this power in the trustees with very little the beneficiaries can do about it.

What do beneficiaries get?

What is the beneficiary entitled to?  Well, until the trustee decides to make an award to him, nothing is guaranteed.  He must take what he gets given.  This sounds clever for trust fund kids who would otherwise want to blow their inheritance: the trustee can force their benefit to be spent on education, or in extreme examples give it all to the super talented child or the one needing it to treat a potentially terminal disease.  This is what the founder trusted the trustee would do to look after things.

The trust assets do belong to the beneficiaries but who and how is unclear.  Imagine the Founder’s lovechild (why the ex is the ex) becoming entitled to everything and his other children getting nothing (because the mistress is the trustee).  Well, if that’s what he wanted?  If that’s what the trust deed provided for what can the other beneficiaries do?  Not much.

Trusts in BEE ownership structures:

The usage of trusts has continued to evolve (despite Napoleon’s best efforts) and we have seen them used in South Africa for many BEE transactions.

The BEE Commission is looking carefully (generally unfavourably) at their use and in particular at discretionary trusts.  While not all discretionary trusts are problems one needs to consider if they actually achieve empowerment.

What the Commission looks at includes:

  • Are there criteria to being beneficiaries that can mean one can be and then not be? So if the beneficiaries are defined as being ‘employees’ is potentially not as strong as being defined as ‘black female employees’.
  • Are the beneficiaries even aware they are beneficiaries? If women are the beneficiaries how many know that?  And if they don’t know that they are beneficiaries how can they exercise any rights?
  • Are the beneficiaries entitled to anything? Or does it require trustee support?  If beneficiaries can’t act without trustee support and trustees can act without beneficiary support who has the deed empowered?
  • If the trust is set up to fund education for black people, then what is the entitlement of a black person who receives a bursary this year but doesn’t next year? What ownership or voting rights do they have?

Company structures in comparison:

The Beneficiaries of discretionary trusts must be contrasted to company shareholders who once a shareholder cannot have their shareholders taken from them without their consent, death or insolvency.  Their shareholding is recorded in register with their name and address (that they chose) and they have rights in terms of the Companies Act and the company’s MOI whether the directors agree or not.

This is clearly not the case in discretionary trusts, hence why they are problematic in proving BEE ownership.

Do trusts still have a role to play in BEE?

Yes. In theory a discretionary trust can still work and they are still allowed by the act. However, there are other types of trusts besides discretionary trusts, such as bewind and business trusts, which may be far more suitable.

In such trusts it is imperative to have clearly named and identified individuals.  The assets actually belong to the beneficiaries with the trustees managing the assets.  Sometimes this is because the beneficiary cannot himself (like where the beneficiary is a minor or incapacitated such as severely handicapped) or because he wants a professional manager to look after his and other beneficiaries’ assets.

But when all is said and done the real question for the beneficiaries is the trustee trustworthy?  Because the whole system is still just based on trust…

Does Tusker use trusts in any of our ownership structures?

Yes. The Tusker Trust is a bewind trust (i.e. not a discretionary trust).

bewind trust is a trust where the founder makes a bequest to the beneficiaries and vests the administration of the assets in the trustees. The beneficiaries acquire ownership of the assets, while the trustees only have the administrative control thereof.

In other words, a bewind trust offers all the benefits of legitimate ownership with all the benefits of trusts. It’s ideal for BEE  and addresses all the BEE commissions’ concerns about trusts.

Our beneficiaries have real ownership rights in terms of economic interest (dividends and capital gain) and voting rights. These are assigned at the time of each deal and the trustees work to manage the assets of the beneficiaries, for the beneficiaries. We can easily identify how the ownership rights of each deal accrue to specific black people in our structure, including the beneficiaries of The Tusker Trust.

The Tusker Trust complies with all ‘additional requirements’ of the BEE act and is consistent with substance over form tests. We welcome scrutiny.

Please send us an email (info@tusker.co.za) if you’d like more information.