Trusts are, more often than not, associated with accounts in which idle rich kids keep their money – you may have heard the pejorative term, ‘trust fund kid’. However, this is an inaccurate, oversimplification of trusts. In reality, they are a monetary vehicle that offers a plethora of benefits. So, what is a trust exactly? A trust is a legal arrangement whereby a third party holds property and assets for the benefit of one (or more) people.
The five main statutes governing inheritances in South Africa are:
- The Administration of Estates Act, which regulates the disposal of the deceased’s estates in South Africa;
- The Wills Act, which affects all testators with moveable/immovable assets in South Africa;
- The Intestate Succession Act, which governs the devolution of estates for all deceased persons who have assets in the Republic and who die without a will.
- Income Tax Act aims to consolidate the law relating to the taxation of incomes and donations.
- Trust Property Control Act which regulates the control of trust property.
Why would I want to create a trust?
A trust gives you the power to maintain control of your assets in the event you become unable to manage them yourself due to a decline in mental health. It allows you to save on estate duty taxes, executors fees, property transfer fees and other estate costs.
In addition, Trusts may also be established to retain control over assets even after the original owner has passed away. For example, a Trust can be set up with the purpose of paying education fees of a family member. In this case, the money in the Trust can’t be used for any other purpose.
What are the different types of trusts?
As with all investments, your goals determine the type of Trust that suits you best.
The three primary constituents in a trust
- The Founder: The person who creates the Trust.
- The Trustee: The person, people, or entity (e.g. a bank) that agree to manage on behalf of the Trust the property or assets. There must be a minimum of three trustees, one of which must be an independent trustee meaning someone who has no interest in the Trust or where their appointment as Trustee will not amount to any conflict of interest whatsoever.
- The Beneficiary: The nominated person (or people) who will receive or benefit financially from the property or assets in the Trust. Financial benefits can be distributed in the form of capital or income.
There are two main types of trusts: Living Trusts and Testamentary Trusts.
When a trust is created and becomes active, it’s known as a living trust (also called an inter-Vivos trust.) This type of trust is generally created for estate planning and asset protection purposes, but it may also be motivated by commercial or charitable objectives. When you die, the assets in the Trust are no longer your property. Rather, they become the property of your Successor Trustee, which allows them to be passed effortlessly to the nominated beneficiaries.
Other potential benefits to using a trust include
- Protect assets from beneficiaries – decisions with regards assets can be made by independent and experienced trustees.
- Protection of assets from creditors – Trust assets generally cannot be attached by creditors of the founder, trustees or beneficiaries.
- Estate Planning – Trusts can be used to protect assets from estate duty.
- Tax planning – Trusts can be used to manage assets tax efficiently
- Flexibility – Trusts are more flexible than companies in so far as they are not subject to as much regulation.
Living trusts can also be revocable or irrevocable. This is the way the Trust is set up so basically an inter Vivos Trust can be revocable or irrevocable and will determine how the assets are dealt with.
The Trustee retains full control of the assets and has the right to give away, invest, or manage the property just as you would have before the assets were allocated in the Trust. The Trustee also has complete control of the terms and conditions of the Trust; this means that he/she can change the beneficiaries, the terms or conditions under which beneficiaries will receive the property in the Trust, as well as revoke or terminate the Trust whenever he/she desires.
An Irrevocable Trust requires you to give up all rights of ownership and control to the assets in the Trust. This type of Trust is usually established to reduce taxes; since the assets are no longer in your ownership, you aren’t obliged to pay taxes in them.
A testamentary trust is one that is established as per the last will and testament of a deceased individual (the trustor); there can be multiple testamentary Trusts contained within a will. Trustees are named in the will and are responsible for the management and distribution of the trustor’s assets to the beneficiaries as directed in the will.
This type of Trust is used primarily when the beneficiaries are minors (children under the age of 18); it can also be used to reduce estate tax liabilities. The estate of every person in South Africa will be subject to the laws that regulate the administration of deceased estates in the event of their death. It’s important to note that a testamentary trust is irrevocable.
A trust can be used for many different purposes. They are often a significant part of estate planning, can be used simply for privacy or even tax planning. Whatever reason you choose to set up a trust, you still must pay tax to the South African Revenue Service (SARS). Generally, a trust is taxed at 40%, but specific types of trusts can be taxed on a sliding scale from 18% to 40%.