Trusts can take many forms and serve a range of purposes in your overall portfolio, and this area of planning should ideally be undertaken with guidance and advice from a fiduciary expert. If you’ve decided to set up an inter vivos trust, which is a trust formed during your lifetime, there are a number of factors to be considered before registering your trust.
What do you intend to achieve by establishing a trust?
Before establishing a living trust, it is essential to have a clear understanding of your objectives. A trust can serve multiple purposes, and its structure should align with your long-term estate planning goals. Common motivations include transferring growth assets out of your estate to limit estate duty and other taxes, protecting assets for future generations, and ensuring seamless intergenerational wealth transfer. When structured correctly, a trust can safeguard assets from risks such as capital gains tax, estate duty, divorce, insolvency, and family conflict. It also provides protection against creditors, particularly useful where the founder is engaged in high-risk ventures. From a tax perspective, trusts are effective vehicles for mitigating estate duty, income tax, donations tax, CGT, and executor’s fees. Furthermore, a trust can offer ongoing asset management for beneficiaries who are unable to manage their own affairs, such as in the case of a mental disability, addiction, or other incapacitating conditions, ensuring the responsible administration of their inheritance.
Which type of trust best aligns with your objectives?
The type of trust you choose to register should be guided by the purpose you want it to serve. If your objective is to preserve and manage assets for the benefit of your family and future generations, then a family trust may be the appropriate structure. In such cases, the founder, trustees, and beneficiaries are often related, and the appointment of an independent trustee becomes crucial to ensure impartiality and sound governance. Alternatively, if you opt for a bewind trust, the assets remain legally owned by the beneficiaries, while the trustees are entrusted with managing those assets. In contrast, an ownership trust involves the transfer of ownership to the trustees, who then administer the assets for the benefit of the beneficiaries. Another key consideration is whether your trust will be vested or discretionary. In a vested trust, beneficiaries have fixed rights to benefits as outlined in the trust deed. In a discretionary trust, trustees are granted the authority to determine how and when income and capital are distributed, allowing for greater flexibility in managing the needs and circumstances of the beneficiaries.
Are you ready to relinquish control of your assets?
As the founder of the trust, it is imperative that you are fully prepared to relinquish control of the assets to your appointed trustees. This transfer of ownership can be effected either through a loan, by selling the assets to the trust, or by way of a donation, bearing in mind that individuals may donate up to R100 000 per year without incurring donations tax. If you retain undue control over the assets post-registration, you run the risk of the trust being classified as an alter-ego or sham trust. In such cases, the assets may be deemed to form part of your personal estate, with potentially severe financial consequences. Once the trust is registered, it must be clearly evident that the assets are under the authority of the trustees. Alter-ego trusts are frequently exposed in acrimonious divorces, often as a means to conceal assets, and in these instances, courts may ‘pierce the veil’ of the trust. Lastly, if you rely on an asset for your retirement funding, consider carefully before transferring it to a trust, as this may impact your long-term financial independence.
How will the trust integrate with your broader estate plan?
Before registering your trust, give careful thought to how it fits into your broader estate plan. One of the key benefits of a trust is its ability to provide continuity, as it does not die with you. Assets held in a trust remain accessible to beneficiaries and are not subject to the delays of estate administration or the risk of being frozen upon your death. A trust also allows for effective estate-pegging, ensuring that any future growth on the asset occurs within the trust—thereby reducing the overall value of your personal estate and, in turn, lowering your tax exposure.
What are the tax implications of the trust?
The way in which your trust will be taxed depends on several key factors, including the type of trust you establish, whether it qualifies as a special trust Type A or B, how the trust deed is drafted, and how the trust is ultimately classified. Depending on the structure, the income generated by the trust may be taxed in the hands of the founder, the beneficiaries, or the trust itself. Most trusts are taxed at a flat rate of 45%, with the exception of special trusts Type A, which are taxed on a sliding scale from 18% to 45%, similar to individuals. Capital gains on the disposal of an asset, if included in the taxable income of the trust, will have an effective tax rate of 36%, while special trusts would be taxed at 18%. Importantly, trusts are not liable for estate duty. If the trust employs staff, it may also be responsible for PAYE, UIF, and the Skills Development Levy.
Have you carefully considered who will serve as trustees?
As you will be relinquishing control of your assets to the trustees, it is essential to appoint individuals with the necessary skill, integrity, and expertise to manage the trust effectively. If you are establishing a family trust, it is a legal requirement to appoint at least one independent trustee—someone who is neither a family member nor connected to any of the beneficiaries. An independent trustee brings an element of impartiality, reassuring creditors that the trust is properly administered and legally sound. As the founder, you may not act as both the sole trustee and sole beneficiary, as this would contravene the legal principle that a person cannot contract with themselves. In such cases, an independent trustee must be appointed to maintain the trust’s integrity. When considering how many trustees to appoint, three is generally regarded as the optimal number. Too few may limit oversight, while too many can complicate decision-making, delay the convening of meetings, and create practical challenges in signing documents or executing trust-related duties efficiently. Choose your trustees with foresight and care.
Do the benefits of the trust justify the costs?
Before registering your trust, make sure that the financial benefits of having a trust outweigh the costs of having the trust administered. Keep in mind that there are accounting, legal, banking, fiduciary, and secretarial costs involved in managing the affairs of the trust, and it is important to know upfront what costs you can expect to pay. It is also difficult to find experienced fiduciary experts, so be sure to find out what you can pay for this type of expertise.
Who will your beneficiaries be, and what rights will they have?
It is important to be clear about who you wish to benefit from the trust and how you intend for them to benefit. Beneficiaries may be individuals or organisations, and they may qualify to receive income, capital, or both from the trust. Beneficiaries can hold either vested or discretionary rights. Those with vested rights are entitled to specific benefits as outlined in the trust deed. In contrast, discretionary beneficiaries have no guaranteed entitlement and may only receive a benefit at the discretion of the trustees. An income beneficiary may receive regular distributions from trust income, while a capital beneficiary may be granted a distribution of capital—again, at the trustees’ discretion – keeping in mind that a beneficiary can be both a capital and income beneficiary.
When and how will the trust be terminated?
Carefully consider how and when your trust will be brought to an end. You may choose to terminate the trust after a specific period, upon the death of the last beneficiary, or once the youngest beneficiary reaches a certain age. Alternatively, you may leave the decision to your trustees, allowing them to wind up the trust when appropriate—an approach that offers flexibility in the face of future uncertainties.
Your trust deed serves as the cornerstone of your trust, and its significance should not be underestimated. It defines the structure, purpose, and operation of the trust, making it essential that it is drafted with precision and care. We strongly recommend seeking professional guidance when establishing your trust to ensure it complies with all legal requirements and is tailored to support your long-term estate planning goals with clarity and confidence.
Have a fantastic day.
Sue
