On 28 June 2018 SARS issued an interesting binding private ruling, BPR 306, in which the applicant, a person in the early stages of dementia but still lucid and with the capacity to contract, distributed part of her estate to a special trust she had established for her care and maintenance. The distribution was ruled not to be a donation.
A special trust established inter vivos, as was the case in the present matter, is one created for the benefit of one or more persons with a disability as defined in section 6B of the Income Tax Act, 1962 (Act). This means a moderate to severe limitation of any person’s ability to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment that has lasted or has a prognosis of more than a year. Clearly, dementia qualifies under this definition.
In addition to the applicant, there were other beneficiaries of the trust. The trust was discretionary as to all beneficiaries. The fact that there were other beneficiaries did not affect the trust’s status as a special trust, because their discretionary right would come into operation only on the death of the applicant. This is an important point for estate planning purposes; one may establish a special trust that continues seamlessly for the benefit of the remaining beneficiaries without the need to terminate the trust and create a new one for those beneficiaries by establishing two classes of beneficiary and only the disabled person having rights until that beneficiary’s death.
[In passing, using this two-tier approach for beneficiaries might have made it easier for the executors of Mr Welsh’s estate to win their case in Welsh’s Estate v CSARS [2004] 66 SATC 303 SCA. Mr Welsh had established a trust for the benefit of his former wife and son Tom in terms of their divorce agreement. Mr Welsh died before he had transferred the obligatory funds into the trust, so the executors were obliged to do so. SARS treated the payment as a donation by the executors, who ultimately prevailed in the SCA in showing that they had performed an obligation, not made a donation. But what made their life more difficult than it should have been was that Mr Welsh had included himself and his other children as discretionary beneficiaries as well, although the trust deed indicated that the trust had been established in pursuance of the provisions of the divorce agreement. Mr Welsh would have been better advised to have created two classes of beneficiary: the first being his former wife and Tom as primary beneficiaries; and himself and his other children as secondary beneficiaries, to be considered only after the obligations to the primary beneficiaries had been satisfied].The purpose of the trust was to provide for the applicant’s care and maintenance when she was no longer able to do so. SARS ruled that the distribution to the trust was not a donation as contemplated in sections 54 and 55 of the Act.
This decision is interesting, because it did not state what the distribution was if it wasn’t a donation. It seems also that the drafter of ruling was confused, because its title was the same as this summary. The reason for this conclusion would be illuminating – and helpful to estate planners. Perhaps the reason is that there was a quid pro quo in that the trustees were obliged to care for the applicant when the time came. It is trite law that a payment to a person with a corresponding obligation is not a donation. An alternative conclusion would have been that the distribution was a donation but that it was exempt from donations tax under section 56(2)(c), a bona fide contribution towards the maintenance of any person as the Commissioner considers to be reasonable. There is no requirement that the contribution be made directly to the person for whose maintenance it is made.
