Trusts are very popular arrangements for many South Africans whose objective it is to pass on their valuable assets to their beneficiaries.
The reason behind both the popularity and effectiveness of trust structures is that the founder thereof can appoint one or more trustees with powers to administer the trust in the best interests of their named beneficiaries.
So what is a trust?
A trust (also known as a trust fund) is a formal transfer of assets using a legal document to a trustee or multiple trustees, with instructions to hold the assets for the benefit of others (beneficiaries).
There are essentially two types of trusts – Living or Inter Vivos Trusts and Testamentary or Will Trusts.
1. Living Trusts
A living Trust is formed when a Trust Deed, which is the founding or governing document, is lodged at the office of the Master of the High Court, whereafter Letters of Authority are issued to the Trustees. It is these letters that authorise the Trustees to act on behalf of the Trust.
2. Testamentary or Will Trusts
This type of Trust comes into effect after death and is provided for in a Will. In most cases the reason for creating such a trust comes from a need to protect the ultimate beneficiaries, such as minor children, surviving spouse, and children or other dependants who cannot look after their own affairs.
The provisions of the trust are set out in the Will and, for all intents and purposes, the Trustee is legally obliged to enforce these provisions. The provisions will usually provide for the termination of the trust on fulfilment of certain conditions.
Here are some Motivations for using a Trust:
Asset management, protection and estate planning during your lifetime. One of the main reasons for forming an inter vivos Trust is estate planning. Assets are moved into the Trust, either by way of a loan or donation. Proper planning and appropriate advice are required.
Protection of minor children or beneficiaries with developmental disabilities. Trusts can be used to protect the interests of children until they are old enough to handle their own financial affairs.
Limited financial skills of dependants or beneficiaries. Trusts can be used to protect the interests of dependants or beneficiaries with limited skills in financial matters.
Continuity/perpetual succession. When a person passes away his/her estate might take months to be finalised. Beneficiaries will only be able to access estate assets once the executor has gone through the required process and formalities. A Trust, however, is a separate vehicle and will not be affected by the death of the founder; it will continue to operate as before. Furthermore, the Will of a deceased person becomes a public document on death, whereas a Trust remains a private affair and is not open to public scrutiny.
lnsolvency of beneficiaries/claims by creditors and matrimonial disputes. The Trust property does not form part of the personal estate of the beneficiaries until vesting takes place, in other words until the beneficiaries actually receive the property. In a discretionary Trust, this only occurs when the trustees exercise the option to distribute assets to beneficiaries. Assets held in trust are therefore protected from the claims of the beneficiaries’ creditors.
Indivisibility of assets. Certain assets, such as farm property or certain business entities, are not always suitable for dividing among beneficiaries. A Trust is an ideal vehicle for taking ownership of such assets, keeping the assets intact and allowing the beneficiaries to fully appreciate the benefit of the assets concerned.
There are many Advantages to Holding Assets in a Trust. But are there any Disadvantages?
While the advantages definitely outweigh the disadvantages, there are three key issues to be aware of before registering a Trust:
- Relinquishing of control
- Assets are transferred to the Trust and managed by the trustees for the benefit of the beneficiaries in accordance with the provisions of the trust deed. This means that the assets no longer belong to the original owner. The Trust is not permitted by SARS to simply be the alter ego of the donor. SARS requires evidence that the owner has relinquished control and may allocate the income of the asset back to the owner for tax purposes if the tax authority believes control has not been sufficiently surrendered.
- All family trusts require at least one independent trustee. This is a person who is not related or connected by blood or otherwise to the trustees, beneficiaries or donor. This trustee is obliged, when appointed, to inform the Master about any changes in the beneficiaries of the Trust. The independent trustee must also provide, on request, any information the Master requires regarding the affairs of the Trust.
- A Trust does not exist for the benefit of the donor. Trustees can only distribute the assets of the Trust to the beneficiaries in accordance with the trust deed. For this reason, careful drafting of the trust deed is vital. Similarly, trustees should be chosen with care, and not merely for their status or connection with the family. Trustees who don’t act from the right motives can put the effective administration of the trust at risk.
- To ensure good governance and independence, no one can be the sole trustee and sole beneficiary of a trust.
- Costs
- It costs between R9 000 and R15 000 to register a trust. Then there are other costs, such as the trust bank account and administrative costs. Annual financial statements and tax returns must be prepared, but a trust does not ordinarily require an annual audit unless requested by the Master.
- Taxation
- Whilst, admittedly, trusts are not the most tax efficient vehicles (attracting income tax at the higher marginal rate of 45%) there are however strategies that can be utilised to lessen the tax impact. One of these strategies is by applying the conduit principle.
- In South African tax law there is the common law principle of a conduit pipe. The principle is that the trustee of a trust is a conduit in certain circumstances. For instance, if a company declares a dividend in respect of shares held by a trust, and the trustees promptly distribute the dividend to the beneficiaries, the dividend retains its nature and is taxed in the hands of the beneficiaries and not in those of the Trust. By so doing both the amount taxable can be divided (and thus diluted) amongst the beneficiaries, with the tax rate of the beneficiaries being lesser than the Trust’s tax rate.
In conclusion…
As with any investment or asset protection strategy, you need to consider all the potential risks of a Trust structure concerning your financial and family circumstances. Our expertise and experience position us to assist you to make the right decisions.
Lwazi Dekeda | Director | Attorney, Notary & Conveyancer