For many South African families, the question of how best to preserve and transfer wealth from one generation to the next has become increasingly important. Rising life expectancy, complex family structures, and shifting tax legislation mean that estate planning must extend well beyond a simple Will. One of the most powerful vehicles available to achieve this is the living trust—a flexible structure that not only protects assets but also ensures that they are managed with care and intention long after the trust founder has passed away.
How a living trust works
A living trust (inter vivos trust) is established by a founder during their lifetime through the drafting of a trust deed, which sets out the terms, powers, and objectives of the trust. The founder transfers assets into the trust, which are then legally owned by the trust itself and managed by trustees for the benefit of its beneficiaries. While the founder no longer owns the assets personally, they retain influence through careful drafting of the trust deed and by appointing trustees who will carry out their wishes.
Did you know? The Master of the High Court must authorise every trust and issue Letters of Authority before the trustees can legally act in South Africa.
Moving assets into a trust (estate pegging)
The most common method of funding a trust is through a loan from the founder. The founder sells assets to the trust at market value, creating a loan account in their personal name. This loan account is then reduced over time, either through annual donations (up to R100 000 per person per year, free of donations tax) or through repayments from income generated by the trust assets. Over the years, this technique—known as estate pegging—ensures that the value of the founder’s estate is frozen, while the growth on the underlying assets accrues within the trust, outside of the founder’s estate for estate duty purposes.
Did you know? Donations above R100 000 in a tax year attract donations tax of 20% on the excess amount. This rate increases to 25% on the cumulative value of all donations made since 1 March 2018 that exceeds R30 million.
Growth assets in a trust
Trusts are particularly well-suited to housing growth assets—such as listed equities, unit trusts, private company shares, or property—that are intended to benefit future generations. By placing these assets in a trust, the founder effectively ensures that future capital appreciation does not inflate their personal estate. Instead, the compounding growth takes place within the trust, allowing the family wealth to expand while remaining shielded from estate duty, capital gains triggered by death, and the delays of estate administration.
Did you know? Assets that grow in value within a trust can remain there for decades, compounding free of estate duty each time a generation passes away.
The estate planning advantages of trusts
One of the unique features of a trust is that it never dies. Unlike individuals, who are subject to estate duty and executor’s fees on death, trusts continue seamlessly from one generation to the next. This means that assets housed in a trust bypass the estate administration process, avoiding costly delays and ensuring continuity for beneficiaries. For families with multiple heirs, this continuity is invaluable: rather than a property or business shareholding being split among children—often leading to conflict or forced sales—the asset remains intact in the trust and the trustees oversee its use for the collective benefit of beneficiaries.
Did you know? Executor’s fees are generally charged at up to 3.5% of the gross estate, plus VAT if the executor is VAT-registered, and bypassing estate administration on the trust assets can therefore save significant costs.
Vested vs. discretionary trusts
In estate planning, two main types of trusts are relevant: vested and discretionary. In a vested trust, the beneficiaries’ rights are fixed and clearly defined in the trust deed. They are entitled to specific assets or income, and the trustees have little discretion. By contrast, a discretionary trust grants trustees the authority to decide how income and capital should be distributed among the beneficiaries, within the framework provided by the founder. The discretionary trust is generally favoured for generational wealth planning because it allows flexibility, offers stronger asset protection against creditors and divorces, and enables trustees to adapt to changing circumstances.
Did you know? Courts can ‘look through’ vested trusts, as beneficiaries hold enforceable rights, while discretionary trusts offer stronger asset protection.
Expressing the founder’s intentions
The trust deed is the cornerstone of the trust as it records the founder’s wishes and provides the framework for trustees to manage the trust long into the future. Well-drafted deeds balance structure with flexibility—giving trustees enough discretion to adapt to new circumstances while ensuring that the founder’s vision is honoured. For example, the founder may stipulate that the trust should fund education for all descendants, preserve a family holiday property, or maintain an investment philosophy centred on stewardship and long-term growth.
Did you know? A letter of wishes, while not legally binding, is often used alongside the trust deed to guide trustees on the founder’s values and intentions.
Tax implications of a living trust
While trusts offer significant estate planning benefits, their tax treatment must be carefully managed. Income retained in a trust is taxed at a flat rate of 45%, while capital gains are taxed at an effective rate of 36% (based on an 80% inclusion rate). However, the conduit principle (applicable to South African residents only) allows income and gains distributed in the same tax year to be taxed in the hands of beneficiaries, often at their lower individual marginal rates. For individuals, the maximum marginal income tax rate is 45%, while the maximum effective capital gains tax rate is 18% (40% inclusion × 45%). This can result in meaningful tax savings if distributions are planned strategically.
Donations tax of 20% applies to donations exceeding the R100,000 annual exemption per donor, increasing to 25% on cumulative donations above R30 million. This is particularly relevant when reducing loan accounts advanced to trusts. Strategic tax planning—ideally in consultation with a financial planner and fiduciary specialist—is therefore essential to ensure the trust structure remains efficient and compliant.
Did you know? The conduit principle only applies if distributions are made within the same tax year, meaning that timing is critical for tax efficiency.
At their core, trusts are not just about tax efficiency or estate duty savings—they are about stewardship. A well-structured trust honours the principle that wealth is not merely to be consumed by the current generation but to be preserved, nurtured, and grown for those who follow. By providing a structure that protects assets from erosion, manages them responsibly, and distributes them in line with family values, a trust ensures that wealth becomes a lasting legacy rather than a fleeting inheritance.
Trusts are not suitable for everyone, and they require ongoing administration and professional input to remain effective. However, for families serious about preserving generational wealth, they are among the most powerful estate planning tools available. By housing growth assets in a trust, pegging the value of the founder’s estate, appointing competent trustees, and setting clear guidelines in the trust deed, families can protect their wealth against the twin forces of taxation and fragmentation. More importantly, they can create a structure that ensures their wealth serves as a foundation for future generations—a true expression of stewardship in practice.
Have a fantastic day!
Sue
