(This article focuses on Inter Vivos, also known as “living” trusts)
Almost everybody knows about trusts, but few people actually know how they work and how they can make them work for them. Trusts are most definitely NOT just for the rich and famous. They are for everybody, and with this article I will try to answer some questions you might have regarding them.
- What is an Inter Vivos, or “living” trust?
A trust can be described as a legal relationship which has been created by the founder who places assets under the control of trustees. This either happens during the founder’s lifetime (Inter Vivos trust) or at the death of the founder (testamentary trust).
Section 1 of the Income Tax Act No 58 of 1962 defines a trust as “any trust fund consisting of cash or other assets which are administered and controlled by a person acting in a fiduciary capacity, where such person is appointed under a deed of trust or by agreement or under the will of a deceased person.”
A trust can be a useful tool when it comes to planning one’s estate. A trust creates a legal relationship between a person (known as the donor) who places his or her assets under the control of another person (known as the trustee) during the donor’s lifetime (an Inter Vivos trust) or on the donor’s death (will or testamentary trust) for the benefit of third persons (the beneficiaries).
A trust should not be confused with an entity like a company, as it does not enjoy an independent existence. A company on the other hand may be owned, sold and transferred, whereas a trust cannot. Any property which is held in trust is held by the trustee in his or her capacity as trustee on behalf of the beneficiaries of the trust.
- What are the benefits of having an Inter Vivos trust?
- Reducing estate duty – Inter Vivos trusts can be used to minimise estate duty. No estate duty should be payable on assets owned by the trust as a trust does not die. Estate duty is currently taxed at 20%. This estate duty saving can be substantially large especially for high net worth individuals who are worth millions of Rands.
- Protection against creditors – As the trust’s assets are not owned by the beneficiaries, creditors do not have a claim on the assets. This advantage is especially important for people who have exposure to potential liability. Companies as well as individuals are able to transfer assets into trusts. A few years ago, an airline company was liquidated and the creditors never had a claim on the airplanes. This was because the planes were in the name of a trust and the company rented these planes from the trust.
- Flexibility – A discretionary trust is extremely flexible, and can be administered to take into account changes over time in family, financial and legislative circumstances.
This means the trustees can manage the trust’s assets in the best interest of the beneficiaries at any particular time by taking into account all relevant factors. This flexibility caters for such uncertainties as divorce, insolvency, increase in family size or fortunes, and of course annual changes to tax legislation.
- Family asset management – A trust can provide a centralised asset management structure and controlled distributions for beneficiaries who are not in a position to manage assets themselves. This may be due to minority, disability or prodigality. A trust can provide for joint ownership of indivisible assets like holiday homes and farms.
Should the estate owner subsequently be mentally incapacitated through sickness or injury, a trust prevents the need for the appointment of a curator bonis (a person appointed by a court to manage finances) to take care of the founder’s affairs. The special trusts, when registered as such, are taxed at a sliding scale of 18% – 41%, same as natural persons, and NOT at the flat rate of 41%
- Continuity – A trust can cater for multiple generations as when any of the trustees pass away; the trust and any assets owned by it remain unaffected. When a particular beneficiary passes away, only the assets vested in him or her upon date of death would form part of his or her estate for estate duty purposes.
- What are the disadvantages of setting up a trust?
- Loss of control – To a certain extent, there is a loss of control over the ownership and the administration of the assets within the trust as the assets belong to the trust and are managed by the trustees in terms of the trust deed. It is important to understand that the donor no longer owns the assets in the trust and the appointment of an independent trustee is crucial although not required by law.
- Income tax – Income tax is payable at a flat rate of 41% by the trust whereas individuals pay tax according to how much they earn. HOWEVER, all is not lost as the taxes can be shared by the beneficiaries who would be taxed in their personal capacities which may negate the need for the trust to pay any tax at all. (The benefit of saving on estate duty usually outweighs these costs.)
- Costs – There are certain costs involved in setting up and running the trust, for example, the costs of paying professional persons to administer the trust, prepare annual financial statements and to file income tax returns. (It can cost up to R20 000-00 to set up a trust, our price is ONLY R5750-00.)
As you can see, trusts have many benefits and if managed properly; can benefit coming generations or institutions, for a long time to come. It can be your living legacy, or your helping hand long after you have gone.