Thinking of setting up a Trust?
Abrahams & Gross share some frequently asked questions and answers regarding creating a Trust:
What is a 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 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 different types of Trusts can I consider?
Various types of trusts may be created in South Africa, the most commonly used are known as:-
Inter Vivos/ Living Trusts
An inter vivos trust comes into being during the lifetime of the donor with the signing and registration of a trust. It is created either to save money on taxes or set up long term property/ asset management. These types of trusts do not have to pay estate duty, reduce taxes payable, protect financial privacy and regulate the use of assets if the owner becomes incapacitated, or may be used to safeguard wealth.
These kinds of trusts may be either vested/bewind or discretionary trusts. In vested/bewind trusts, the trustees are directed by the trust deed as to how the benefits are distributed to the beneficiaries, whereas in discretionary trusts the beneficiaries are only entitled to receive a benefit once the trustees have decided to benefit them. The trustees have full discretion to determine the benefits made to the beneficiaries.
Testamentary Trusts/ Will Trusts
These types of trusts come into existence after the death of a testator and look after the interests of minors and other dependants who are not yet able to look after their own affairs. Trusts are also often created to ensure a surviving spouse has access to income during the remainder of their lifetime whilst ensuring that there is capital for children thereafter. This is a useful estate duty saving tool if used correctly. The trust is created in terms of the testator’s Last Will and Testament (which serves the same purpose as a Trust Deed) and usually only remains in existence for a certain period of time, for example, when the minor child reaches a certain age or a beneficiary dies, etc. The trustees are appointed in terms of the Will and are issued their Letters of Authority by the Master of the High Court under which they act. This type of trust may be a discretionary trust or a vested trust.
What are the advantages of creating a Trust?
Some of the main advantages of placing your assets in a trust include:
- It is a vehicle for asset protection. Since assets in a trust are not owned by the trustees or the beneficiaries, the creditors of trustees or beneficiaries have no claim against the trust (although this is not always the case as in a vested trust, the beneficiaries may have a claim against the trust should they be able to prove that the trustees have not distributed the assets according to the trust deed).
- It establishes 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.
- Your assets may be excluded from certain taxes, such as Estate Duty, by transferring your growth assets into the name of a trust. For as long as the trust is maintained and retains the assets for the unvested and unspecified benefit of the donor’s beneficiaries no estate duty is liable to be paid on the death of a trust beneficiary.
The trust may also be able to avoid paying Capital Gains Tax (CGT) upon the transfer of a capital asset to a beneficiary, and pass this liability onto the beneficiary themselves ie. the trust would not pay CGT at a trust rate but pass this over to a beneficiary to pay at a personal rate. This also applies to trust tax – if you use the trust correctly and distribute the income earned in the trust per annum to the beneficiaries, then the beneficiaries will pay the applicable tax at a personal rate as opposed to the trust at a rate of 40%. There have been rumours that SARS/ Revenue is working on trying to get rid of this “conduit principle”. If you are planning to use a trust correctly you need to work closely with both an attorney and an accountant to ensure the correct principles are applied.
What are the disadvantages of creating a Trust?
There are however, certain disadvantages to setting up and administering a trust, in particular:
- 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.
- 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.
- Income tax is payable at a flat rate of 40% 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.*
- Capital Gains Tax is payable at a rate of 26.6% in respect of a trust, whereas for an individual it payable at a rate of 13.3%.*
* The benefit of saving on estate duty usually outweighs these costs.
From the above it is clear that setting up a trust would not be in every person’s best interests, therefore, it is important to consult with an experienced legal practitioner when making the decision to create a trust.
If you need more information or legal advice on the subject, please contact Abrahams & Gross Attorneys for assistance.
t. 021 422 1323 | e. email@example.com
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