We often hear people speak about ‘putting’ a holiday home, investment portfolio or family business into a trust as though a trust were simply another type of account into which assets can be transferred. In reality, a trust is neither an investment product nor a convenient filing cabinet for family wealth, but a legal arrangement governed by a trust deed, legislation, tax law and an increasingly demanding compliance framework. Trusts can play an important role in estate planning, particularly where assets need to be protected and managed across generations, but they are not appropriate for everyone. Before establishing one, it may be worth understanding some of their less obvious features.

1. A trust is not a separate legal person

Although a trust is treated as a separate taxpayer for income tax purposes, it is generally not a legal person in the same way that a company or close corporation is. In a conventional ownership trust, the trustees hold and administer the trust property in their official capacities for the benefit of the beneficiaries, and it is the trustees who must enter into contracts, open bank accounts and institute legal proceedings on behalf of the trust. This distinction is important because describing the trust as though it can think, decide and act for itself obscures the legal responsibility carried by the trustees.

2. Signing a trust deed does not give trustees authority to act

A trust deed may nominate the trustees, but those individuals may not act as trustees until the Master of the High Court has authorised them in writing by issuing Letters of Authority. This means that trustees should not begin signing agreements, purchasing assets or opening accounts merely because the deed has been executed. Section 6 of the Trust Property Control Act is clear that a trustee may act only once authorised, and transactions concluded prematurely may be invalid rather than administrative oversights that can simply be corrected afterwards.

3. One trustee cannot necessarily make decisions for everyone

A family trust is not a private company in which the founder can behave as managing director while the remaining trustees merely sign documents when required. Trustees must generally act jointly, although the trust deed may permit decisions by majority or allow a trustee to perform specific acts under properly delegated authority. Before a contract is signed, there should therefore be a valid trustee decision, supported by a resolution and taken in accordance with the deed. The fact that the other trustees agree afterwards does not necessarily cure a lack of authority when the decision was made.

4. Being a beneficiary does not mean owning part of the trust

A beneficiary of a discretionary trust does not ordinarily own a percentage of the trust assets and cannot demand a distribution merely because they are named in the deed. Until the trustees exercise their discretion in that beneficiary’s favour, the beneficiary generally has no vested right to the income or capital, although they retain an interest that trustees must consider and protect. This is one of the reasons a properly administered trust can facilitate intergenerational planning, but it also means that a founder should not promise beneficiaries assets that legally remain subject to trustee discretion.

5. A trust deed may not be as easy to change as expected

Founders often assume that, because they created the trust, they can rewrite the deed whenever family circumstances change. However, an inter vivos trust deed has contractual characteristics and, once a beneficiary has accepted benefits under it, that beneficiary’s consent may be required for certain amendments, depending on the terms of the deed and the nature of the rights involved. The amendment power contained in the deed must also be followed precisely. A document designed to last for several generations should therefore be drafted with sufficient flexibility from the outset, rather than on the assumption that it can always be rewritten later.

6. Asset protection requires the founder to surrender control

A trust cannot provide credible asset protection if the founder continues treating its bank account, investments and property as personal assets. Once property has been transferred, the trustees must control it independently, apply the trust deed and make decisions in the interests of the beneficiaries. If the trust is used merely as the founder’s alter ego, with resolutions created after the event and personal expenses paid indiscriminately, the separation between personal and trust wealth may become increasingly difficult to defend. Effective trust planning therefore requires more than ownership on paper; it requires a genuine change in control and behaviour.

7. Transferring an asset to a trust is a real transaction

An asset does not move into a trust through a bookkeeping entry. It must generally be sold or donated, and the transfer may trigger capital gains tax, donations tax, transfer duty, conveyancing costs and other transaction expenses, depending on the asset and how the arrangement is structured. Existing finance agreements may need to be settled or renegotiated, while insurers, banks and investment providers will require updated ownership records. The cost of moving an existing asset can materially outweigh the future estate-planning benefit, which is why trusts are generally more effective when planned before significant value has accumulated.

8. A loan account does not remove value from your estate

Where a trust buys an asset from the founder but does not pay the full purchase price, the outstanding amount is normally recorded as a loan owed by the trust. While future growth may take place inside the trust, the loan account remains an asset in the lender’s estate until it is repaid, donated or otherwise reduced. Further, where a connected person provides an interest-free or low-interest loan to a trust, section 7C of the Income Tax Act may treat the shortfall between the interest charged and the official rate as an annual donation.

9. Your home may be less tax-efficient in a trust

Families sometimes transfer their primary residence to a trust for continuity or asset-protection reasons without fully considering the tax consequences. An ordinary discretionary trust does not automatically qualify for the primary residence capital gains tax treatment available to individuals and qualifying special trusts merely because a family lives in the property. Ordinary trusts are also exposed to a maximum effective capital gains tax rate of 36%, compared with 18% for individuals and special trusts. The estate-planning advantages must therefore be weighed against the potential tax cost of an eventual sale.

10. A trust is no longer a private family arrangement

Trustees must maintain and lodge beneficial ownership information with the Master, identifying the natural persons who ultimately own or control the trust arrangements, including relevant founders, trustees, beneficiaries and others exercising effective control. Trusts must also remain registered with SARS, submit annual tax returns and maintain proper financial and supporting records even where little or no activity has taken place. Failure to comply with the beneficial ownership requirements can constitute an offence, making the modern trust considerably more transparent and administratively demanding than many founders expect.

A trust can be an exceptionally useful planning structure where there is a clear purpose, sufficient value, suitable trustees and a willingness to maintain the arrangement properly over time. However, the decision should begin with what the family is trying to achieve, rather than with the assumption that assets are inherently better off in a trust. Once the legal, tax and administrative consequences are properly understood, it may become apparent that a trust is precisely the right solution – or that a well-drafted will, appropriate beneficiary nominations and a carefully structured personal estate can achieve the objective more simply.

Have a super day.

Se