Trusts in the Context of B-BBEE

“A trust is a legal entity which is created to hold assets for the benefit of certain persons or entities.” BDO South Africa

Trusts operate under the framework established and governed by the Trust Property Act 57 of 1988 that was established to regulate control of trust property and to provide for matters connected with trusts.

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According to Act 57 of 1988, trusts are “the arrangement through which the ownership in property of one person by virtue of a trust made over or bequeathed (given) to another person, a trustee or trustees, in whole or in part and to be administered or disposed of according to the provisions of the trust for the benefit of the person or class of persons designated in the trust or to achieve the objectives stated in the trust or to the beneficiaries designated in the trust, where property is placed under the control of another person, the trustee and is to be administered or disposed of according to the provisions of the trust to benefit the person or class of persons specified in the trust or to achieve the objectives stated in the trust”. ?

This, however, excludes the case where the property of another is to be managed by any person as an executor, tutor, or curator in terms of the provisions made by the Administration of Estates Act 66 of 1965.

The structure of a trust consists of five elements: the Founder, the Trust, the Trustees, the Beneficiaries, and the Assets.

1. Founder: forms the trust to be able to transfer ownership of assets or funds.
2. Trust: holds the trust property.
3. Trustees: they administer and control the trusts’ assets on behalf of the beneficiaries.
4. Beneficiaries: they benefit from the trust assets. They can be either income or capital beneficiaries and can have vested or discretionary rights.
5. Assets: this is the property of the trust that is transferred to the trust by donations, sales, or death.

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A trust instrument is created by the founder who outlines specific rules and guidelines for how trust assets should be administrated, through a “letter of wishes” and it is not legally binding on the trustees.

It must contain the trust’s aims and objectives, beneficiary names and whether they are income or capital beneficiaries or both, the rights and obligations of the trustees, their powers, remuneration and meeting requirements, the rules for distributing income and capital, duration, and the termination procedure for the trust as well as the procedure that needs to be followed if the trust needs amending.

Read more: https://www.bdo.co.za/getmedia/1ed18ab6-f01e-4a62-83f2-ce1d315d8898/bdo-trust#:~:text=A%20trust%20is%20a%20legal,of%20the%20Income%20Tax%20Act)

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?Trusts and B-BBEE: How do they fit together?

To achieve the objectives of B-BBEE, Black people can hold their Ownership rights in a Measured Entity in the form of a Trust and to ensure that Black people have effective ownership, control and management of the ownership rights held through the Trust, the Codes of Good Practice provide rules for Trusts to adhere to and these same rules apply to Broad-based Ownership Schemes and Employee Share Ownership Programmes.

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The government advocates for and promotes that the implementation of B-BBEE legislation should ensure broad participation of Black people in the economy which will lead to B-BBEE contributing towards addressing the challenges of poverty, inequality, and unemployment. In an ideal setting, a B-BBEE ownership transaction should empower Black people, Black women, Black designated groups, and Black participants in Employee Share Ownership Programmes (ESOPs), Broad-Based Ownership Schemes (BBOS) and Co-operatives. These kinds of ownership transactions must lead to the achievement of B-BBEE objectives.

The rules for Broad-based Ownership Schemes, Employee Share Ownership Programmes and Trusts stipulated in the Codes determine that the constitution of the scheme must define the participants and their claim proportion to receive distributions.

(To learn more, watch our video series on ESOPs and BBOS, https://www.dhirubhai.net/feed/update/urn:li:activity:6934413098032246784 ; https://www.dhirubhai.net/feed/update/urn:li:activity:6934775487730745344 ; https://www.dhirubhai.net/feed/update/urn:li:activity:6935137709699031040 ; https://www.dhirubhai.net/feed/update/urn:li:activity:6936949816836964352 ; https://www.dhirubhai.net/feed/update/urn:li:activity:6937312390485045248 ; https://www.dhirubhai.net/feed/update/urn:li:activity:6937674520375787520 ; )

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?The rules for Trusts, Broad-Based Ownership Schemes (BBOS) and for Employee Share Ownership Programmes (ESOP) in the Codes issued in terms of Section 9 of the B-BBEE Act, 53 of 2003 determine that the constitution of the scheme must define the participants and their claim proportion so they can receive distributions. However, the Codes use of a “defined class of natural person” satisfies the identification requirement.

According to paragraph 3.1.1 of Statement 100 of the Codes, Black people are entitled to participate in measured entities indirectly. This notice expressly recognises the validity of collective enterprises as valid structures for advancing B-BBEE. The interest of that structure, whether a collective enterprise or otherwise, in a Measured Entity, must, legally, be capable of being attributed to Black persons in accordance with paragraph 3.3.1 of Statement 100 of the Codes.

?The option to use a “defined class of natural person” as participants when structuring Trusts, BBOS or ESOP, as opposed to having a written record of their names was expressly provided for in the Codes to advance the B-BBEE Act objectives. These objectives, as per section 2 (c), (e) and (f) of the Act, talk to the broad-based and meaningful ownership by Black people, communities, and workers, and are best served through identifying the class of natural persons that will benefit from the scheme as opposed to listing the individuals with vested rights against the income and capital of the scheme.?

This is not only limited to Trusts, BBOS and ESOP, but other juristic persons as well, that use them from time to time.

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Typically, the defined class of natural persons would have a vested right against the income and capital of the scheme but the individuals that might form part of the defined class do not have a similar vested right, but rather, they have what is commonly referred to as a ‘spes’ or hope to participate. In this case, discretion to the fiduciaries is given and they would select individuals from the defined class of beneficiaries that would benefit from the distributions.?These discretions may sometimes even allow fiduciaries to determine the entitlement proportion of particular beneficiaries once they are selected from the ‘defined class of natural person’.

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These discretions do not contradict the rule that fiduciaries may have ‘no’ discretion when it comes to defining the participants and their claim proportions. As long as the scheme does not give the fiduciaries discretion to distribute less than the fixed percentage to beneficiaries who are members of the ‘defined class of natural person, the requirement that fiduciaries may have ‘no’ discretion related to these terms, are also met.

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Only Black people participants attract recognition on the Ownership scorecard and the Codes place no restrictions on the nature of the participants.

Distributions out of these types of Collective Enterprises may also be, and more often than not are, in kind. Instead of cash distributions to beneficiaries, these schemes pay for skills development, education or training on behalf of beneficiaries or they facilitate access to funding or fund social or community interventions for the benefit of the participants who are a 'defined class of natural persons'. This does not take away from the claimable Economic Interest points.

The terms of a constitution, memorandum of incorporation (MOI) or the trust deed of discretionary Collective Enterprises need to have clearly defined objectives and may provide for a discretion to the fiduciaries to distribute, in their sole discretion, portions of the scheme’s income and capital as they deem fit from time to time to members of a defined class of natural persons, to the exclusion of others.

To qualify for B-BBEE compliance and recognition, Trusts need to follow these rules:

1. The trust deed must define the beneficiaries and the proportion of their entitlement.
2. They must provide a written record/ account of the names of all beneficiaries or use a defined class of natural person to satisfy the identification requirement.
3. They must provide a written record/ account of the fixed percentages of entitlement for all beneficiaries or use a formula to calculate each entitlement proportion that will satisfy the benefit proportion definition.
4. Trustees must have no discretion on rules one to three (1 – 3).
5. Should the Trust be wound up or terminated, all the accumulated Economic Interest must be transferred to all the beneficiaries or to an entity that represents the interests of the participants or class of beneficiaries.

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In addition, Family Trusts have rules to follow for them to be recognised:

1. The trust deed must define the beneficiaries and the proportion of their distribution entitlements.
2. There needs to be a written record or account of the beneficiaries’ names or use of a defined class of natural person to satisfy the identification requirement.
3. There needs to be a written record or account of the fixed percentages of entitlement or a formula for entitlement calculation to satisfy the proportion of benefit definition.
4. The trustees are to have no discretion on rules one to three (1 – 3).
5. Should the Trust be wound up or terminated, all accumulated Economic Interest must be transferred to the beneficiaries or to an entity that represents the interests if the participants or class of beneficiaries.

Important to note for reporting:

When a Measured Entity is called upon to report on its B-BBEE compliance to the B-BBEE Commission, a discretionary Collective Enterprise or one or more juristic structure in its chain of ownership are not capable of reporting on the Black people participants, in terms of classification, their 'number, province, age, etc. because the Codes does not require this kind of verification and the 'defined class of natural person' does not distinguish between them.

A Measured Entity that is unable to produce verified information cannot be compelled to do so and therefore cannot be considered non-compliant with the requirements of Annexure 100 B-D. Unverified information cannot be included in the Ownership Scorecard.