Gazette

A trust can be described as a legal relationship that’s created when one person (known as the founder, donor or settlor) places assets under the control of another (known as the trustee). This can happen during the founder’s lifetime (through an inter-vivos trust) or on the founder’s death (through a testamentary trust). The founder determines what goes into the trust but needs to appreciate that by placing assets into a trust he/she relinquishes control of them.

It is important to establish the legitimate reason for establishing a trust. A trust is an excellent estate planning tool, with benefits that include the following:

• Asset protection: Ownership of the asset passed from an individual to the trust. Beneficiaries may enjoy the benefits of the asset without having ownership. Creditors of the beneficiaries may not lay claim against such assets and these assets can also be protected from future marriages of beneficiaries.

• Estate freezing and the minimisation of estate duty at death: Asset values are established on the day they’re transferred into the trust and these assets can increase in value within the trust. No estate duty is payable on assets owned by a trust as ownership has passed from an individual to the trust and capital gains tax (CGT) only becomes payable when an asset is sold for a profit. Loan accounts do not appreciate in value, so liability is limited. Loan accounts can also be reduced through loan repayments using the annual R100 000 donations tax exemption. This applies to a husband and wife, effectively increasing the annual taxfree donation to R200 000 pa.

• Effective control of assets: A trust is a great way to avoid assets being misused by people. This includes minors, incapacitated persons suffering from mental or physical illness, and even people who simply cannot manage their financial affairs themselves.

• Perpetual succession: The death of a beneficiary does not impact the existence of a trust. The remaining beneficiaries will still be able to continue enjoying the benefits of the assets of the trust. The trust continues indefinitely, provided that it has been sufficiently set up.

• Tax efficient income splitting: Trustees may allocate income and capital to multiple beneficiaries so that the tax obligation is shared, possibly at a lower rate in some instances.

• Legal and financial management benefits: Trustees are subject to the oversight and control of the Master of the High Court and they have established fiduciary responsibilities towards the beneficiaries and assets held in trust. This means that the beneficiaries of the trust enjoy legal and financial management benefits, a great advantage for surviving spouses, minors, physically or mentally handicapped, or aged beneficiaries who may lack the financial and legal skills required to manage investments.

• Greater investment return opportunities: The Guardian’s Fund is effectively a savings vehicle, which means it offers limited growth opportunity. The investment vehicles used for minor beneficiaries traditionally offer a greater investment return.

• Ease of creation and use: Trusts are relatively easy to establish and amend and are considered more flexible than other legal entities. They may be used for a variety of purposes and are subject to minimum accounting and disclosure requirements.   

There are some disadvantages to establishing a trust though:

• You lose full control of the assets placed into the trust as other trustees have a say in the ownership of the assets.

• You could choose the wrong trustees. An example would be where there are contending heirs who might have different opinions on the management and protection of the assets. This may be overcome though, through the appointment of an independent trustee who could have an overriding ruling.

• The income tax rate for trusts is currently 45% on any income retained in the trust. This is the highest income tax rate.

• Trustee liability. A trustee holds a fiduciary office and is thus obliged to always act in the utmost good faith and in the best interests of all the beneficiaries. If the trustee does not act in this way, he/she can open himself/herself to a breach of trust and be held liable in their personal capacity.

• There could be potential changes to trust legislation. The taxation of trusts is under review by the Davis Tax Committee and this may have an adverse effect on certain principles and the tax rates applied to these vehicles.

• Quality of trust deeds and trust administration. If the trust deeds are poorly drafted and there’s substandard tax administration by trustees who don’t know what their responsibilities are in terms of due skill, care and diligence, they can open themselves and the trust to potential risks and disadvantages.  

Finally, there is still merit in establishing a trust for the right reasons. To explore this further please speak to your financial adviser or contact one of our fiduciary specialists through[email protected].

By: Roy McMurchie, Head of Fiduciary Services