1397. Estate planning with Close Corporations
Issue 80 - April 2006
There has been an interesting and exciting amendment to the Close Corporations Act which at last allows Close Corporations to be included in the range of estate planning tools.
Up to now only natural persons (limited to 10) could be members of Close Corporations. From now on both inter vivos trusts (made by living persons) and testamentary or will trusts (made in terms of a Will) will be able to be members. (Previously, trusts could be members only in certain very limited circumstances). There are two obvious benefits:
· An existing company which is owned by an inter vivos trust can be converted to a Close Corporation with resultant administrative cost savings. · Close Corporations which are currently prevented from being included as part of an estate planning exercise, can now be acquired by and included in existing trust structures.However, if you would otherwise enjoy the benefits of being a small business corporation, by making a trust a member, these benefits would be lost. Very careful planning is required.
The conditions for membership of a Close Corporation by a trust are as follows:
· No juristic person (i.e. including a company or Close Corporation) may be a beneficiary of that trust. A juristic person may be the trustee of the trust but not a beneficiary. · A trustee of the trust must be nominated as the member of the Close Corporation and will "personally" have all the obligations and rights of a member. · The Close Corporation is not obliged to have regard to provisions of the administration of the trust or the Trust Deed itself or any agreement between the trust and the members of the Close Corporation. · This permission (for a trust to be a member of a Close Corporation) will fall away if at any time the number of natural persons entitled to receive any benefits from the trust shall, when added to the number of members of the Close Corporation, exceeds 10 (ten). A person entitled to receive any benefit from the trust may, it seems include both vested and contingent beneficiaries and great care will need to be taken in this regard. If the permission falls away, members can become personally liable for all the debts of the Close Corporation.This change represents a definite opportunity for restructuring of groups to include Close Corporations in normal business and estate planning.
Horwath Zeller Karro
IT Act:S 12E(4), definition of "small business corporation"
Close Corporations Act No. 69 of 1984: s 29(1A)
Editorial comment: In view of the uncertainty as to the legal nature of a trust and the difference between contingent and vested beneficiaries, there is still some uncertainty in regard to some of the views expressed in this article.
