Estate planning: Navigating the types and uses of trusts

Legal documents and trusts

Trusts can be used to achieve a number of estate planning objectives if used appropriately and in the correct circumstances. Whether or not a trust should form part of your estate plan depends on a number of factors including your net asset value, the nature of your assets, whether or not you have minor children or special needs dependants, and your succession plans. The primary functions of trusts are to provide asset protection and continuity of ownership, and in certain circumstances, trusts can provide tax advantages. That said, one should never set up a trust solely for tax purposes, but rather as a carefully considered estate planning tool to achieve a specific set of objectives. In this article, we take a closer look at the various types of trusts and the purposes for which they can be used.

Generally speaking, there are three types of trusts available in South Africa, which include the following:

(i) Inter vivos trusts

Living trusts are created during the lifetime of the trust founder and can take the form of either vesting or discretionary trusts. The trust donor or founder sets up the inter vivos trust using a trust deed which sets out the framework in which the trust must operate, including its powers and limitations. In setting up an inter vivos trust, the trust founder essentially creates another legal structure in which certain assets are housed. The trust founder can transfer assets into the trust by sale or donation, but it must be clear that the trust founder intends to relinquish control of those assets. The trustees appointed to the trust become the custodians of the trust assets which they administer according to the trust deeds and in the best interests of the trust’s beneficiaries.

(ii) Testamentary (mortis causa) trusts

Unlike inter vivos trusts, testamentary trusts are set up by the trust founder using a last will and testament as the trust instrument. This type of trust is generally used by a testator for the protection of assets from their deceased estate which is intended for their minor children, although it can be used for other purposes, such as to house assets bequeathed to a mentally or physically impaired spouse or dependant. Such a trust only comes into formation on the death of the testator following which all assets bequeathed to the trust are transferred accordingly and managed by the nominated trustees. As the will is the trust instrument, it is imperative that the will is found to be valid, bearing in mind that no trust can come into fruition if the will is found to be invalid.

(iii) Bewind trust

Bewind trusts are created as trading vehicles and provide trustees with limited liability as well as certain tax benefits for beneficiaries. In a bewind trust, the trust founder sets up the trust in such a way that the assets and income generated from the assets vest in the beneficiaries while the trustees only have administrative control of the trust assets. The trustees are required to manage the trust assets for the benefit of the beneficiaries, who hold beneficial ownership, until the assets are transferred to them, with the transfer of ownership to the beneficiaries being a distinguishing feature of a bewind trust. The trustees of a bewind trust do not have discretion in terms of the trust instrument, and the beneficiaries and their benefits are pre-determined.

The nature of a trust depends largely on when it is created, the rights given to its beneficiaries, and the purpose for which they are created. As such, other forms of trusts include:

Vesting versus discretionary trusts

Depending on the intention of the trust funder, a trust can be set up as either a vesting or a discretionary trust. In a vesting trust, the benefits of the beneficiaries are clearly set up in terms of the trust deed. On the other hand, in a discretionary trust, the trustees are given discretion to make certain decisions regarding the amount and timing of distributions paid to beneficiaries.

Charitable trusts

A trust founder can set up an inter vivos trust for charitable purposes and, if the beneficiary is an approved Public Benefit Organisation (PBO), the trust could qualify for tax exemptions. 

Family (private) trusts

It is possible for the trust founder to set up an inter vivos trust to ensure that certain assets are protected for the benefit of family members through the generations. In such a situation, where the trustees are all beneficiaries and all the beneficiaries are family members, this type of trust is referred to as a family trust. A family trust can also be set up to pursue the philanthropic or charitable goals of a family. However, where all the trustees and beneficiaries of a trust are family members, the Master of the High Court may insist on the appointment of an independent trustee.

Special trust type A

A Type A trust, which can be either an inter vivos or testamentary trust, is created to provide financially for a beneficiary with special needs such as a severe mental or physical disability. If set up correctly in terms of Section 6B (1) of the Income Tax Act, such a trust can enjoy special tax benefits. To qualify as a special person in terms of Type A trust, the beneficiary must have a disability which limits his or her ability to function or perform daily activities and can include physical, sensory, communicative, intellectual or mental impairment. A special trust Type A must be formed solely for the benefit of the disabled person, and the trustees must not stand to benefit in any way. Generally speaking, this type of trust ceases to exist from the beginning of the year of assessment in which the last beneficiary dies.

Special trust type B

In terms of South African law, minor children (i.e. children under the age of 18) have no contractual capacity and are not able to legally inherit until they reach the age of majority. In the absence of a testamentary trust, any funds bequeathed to a minor will be administered by the Guardian’s Fund, which is not ideal. Any other assets, such as fixed or immoveable property, will be administered by the child’s legal guardian until he/she reaches the age of majority. As such, a special trust Type B, which takes the form of a testamentary trust, can be used to house assets bequeathed to the testator’s minor children or relatives.

Business trusts

Business trusts are inter vivos trusts set up to conduct business and generate profits. Such an entity can afford certain protections and advantages that other business entities do not, although it is imperative that the trust is set up correctly. In such a structure, the trustees use the assets of the trust to carry on their business and create profit for the benefit of the trust’s beneficiaries. The assets held in a business trust are protected from one’s creditors, and such this type of trust can be more cost-effective to administer than other business entities.

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