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Trusts are tools to protect and grow wealth for your beneficiaries during and after your lifetime
A trust is an important financial and estate planning tool that, together with your will and other structures, can help protect your personal and business assets during and after your lifetime for your intended beneficiaries. It is critical to get expert advice so that you choose the right trust for your needs and circumstances, because different trusts have different purposes, benefits and limitations.

There are two basic types of trusts, designed to meet specific needs:

1. Testamentary trusts
   The terms of this trust are written into your will and only come into existence after your death. Your will therefore forms the basis of the trust document. In many instances this type of trust seeks to protect the interests and inheritance of minors or vulnerable members of the family (such as elderly parents or spendthrift major children) following their parents death, or the death of the financial provider, and is therefore appropriate in these circumstances. Since the trust is only established on your death, it does not provide any protection for your assets during your lifetime.
   
   
2. Inter vivos trusts (also called a living or family trust)
   You can set up this type of trust at any time. The trust document will be a trust deed which will contain the terms of the trust. It is a wealth structuring tool that is used for various purposes and this type of trust protects assets across generations if you want to leave an inter-generational legacy and can enable you to support beneficiaries financially during and after your lifetime. 

1  Testamentary trusts

Who this is for – parents with minor children or people with vulnerable members in the family
A testamentary trust may be suitable for you if you:

• have children below the age of 18 who are still financially dependent on you; and/or
• have vulnerable members in your family such as elderly parents, spendthrift major children, children suffering with substance abuse; and  
• want peace of mind that your children/family members will be taken care of when you are no longer able to do so yourself through the safeguarding and optimal use of their inheritance.

Purpose – this trust helps you to protect and manage the inheritance of a minor child or a vulnerable member of your family
According to South African law, an inheritance cannot be paid to minor children. This means that, in the absence of a testamentary trust or any other specific testamentary provision, assets left to minor children will be sold, and either placed in the Guardian’s Fund or in an account in the name of the child’s legal guardian. In the Guardian’s Fund the money is either paid to the child when they reach the age of majority (18 years) or paid directly to the legal guardian of the child. In the case of vulnerable family members, a testamentary trust can be useful as you can direct how and when funds should be paid to such members of the family. A testamentary trust therefore facilitates the sound management and control of assets allocated to minor children and vulnerable members of your family, thereby protecting their interests.

In addition to the above, a testamentary trust or an inter vivos trust can also be used to protect the interests of a disabled or mentally challenged child or family member who will not be able to earn an income or provide for their needs. Provided that the terms of the trust comply with the necessary requirements, the trust may be registered as a special trust with the South African Revenue Service resulting in all income and gains in this type of trust being taxed at the individual tax rates and not the tax rates for trusts.

How a testamentary trust works

• The trust is created upon your death, based on a specific stipulation in your will that a trust be set up, who the trustees will be and what powers they will have.
• If, for any reason, your will is invalid, the trust will be invalid and will not come into effect. It’s therefore important to ensure that your will meets the specific, basic requirements to be deemed valid.  

What you should consider when appointing a trustee

• The trustee is the person who will decide how the inheritance set aside for your children and/or vulnerable members of your family will be managed, and how much money should be spent on their care and maintenance until, as for example in the case of minor children, they reach a specific age.
• The person you nominate as a trustee should therefore have the necessary skills and experience to manage your children’s inheritance.
• Although you can nominate the same person to be both trustee and guardian of your child, this can cause a conflict of interest. It is therefore advisable to appoint an independent person as a trustee. 

Taxes – your assets will still be liable for estate duty
A testamentary trust only comes into existence after your death. At the time of death, your assets still belong to you and will therefore form part of your estate. This means estate duty (if applicable) will first be subtracted from your estate, before being transferred into the trust.

2  Inter vivos trusts

Who this is for – those who want to protect their assets for future generations both during and after their lifetime
An inter vivos trust may be suitable for you if:

• you have growth assets that you want to remain in your family for future generations and that you want to protect from poor decision-making by beneficiaries;
• you want to support beneficiaries during your lifetime and after your death by providing for them financially;
• you want to ensure that your death has minimal impact on your assets by providing for seamless continuity of these assets on your death;
• you want to protect your assets both during and after your lifetime; and
• you want to limit the impact of costs, such as executor’s fees and estate duty on your death. 

How it works

• An inter vivos trust is established during your lifetime to manage assets for you and your beneficiaries.
• You transfer assets and/or cash into the trust during your lifetime either by way of a loan or donation (cognisance however needs to be taken of the tax consequences linked to both loans and donations made to trusts which are outside the scope of this article).
• You have a say in how the trust deed is drafted to ensure it reflects your wishes as to how the trustees should manage the trust assets. The trustees are bound by the deed and trust legislation and can only act within the powers this gives them.
• You can determine which beneficiaries may receive an income from the trust and which may receive capital. 

Key benefits

• Overcome challenges related to dividing up assets between beneficiaries
  A trust deals with the problems of dividing up assets between beneficiaries, such as a primary home or holiday house, by providing a vehicle for the joint ownership of these assets. Because there is no limit on the life of a trust, the holiday house will be managed by the trustees for current and future generations.
• Peg the value of your estate to limit estate duty
  By transferring assets that are likely to increase in value (such as shares) to a trust, you can reduce or eliminate the estate duty payable on them over time. This is because the growth in the value of the shares will occur in the trust, not in your estate. The asset also won’t form part your beneficiaries’ estates when they die, since the asset remains the property of the trust and thus would not be subject to estate duty in their estates. You can also save on an executor's fees and other estate costs.
• Protect your personal assets against the risk of your business failing
  If you have a business in your name, the trust may provide protection of your personal assets in the case of your business becoming bankrupt. If you become insolvent, it makes it more difficult for your creditors to claim against the assets held in the trust, even if you are one of the trustees.
• Protect your assets if you become incapacitated and aren’t able to manage your affairs
  If you have an existing trust, it won’t be necessary to appoint a legal representative to manage your financial affairs if you become mentally incapacitated.
• To ‘house’ your international assets
  An international trust set up in a properly regulated offshore financial centre such as Guernsey, is an ideal vehicle for housing your international assets. It offers all the traditional benefits of a trust and can help you avoid the complexity and costs of winding up your estate in foreign jurisdictions.

Disadvantages

• You no longer own or control the assets in the trust
  Although you may have a say in the drafting of the trust deed (as discussed above), the assets you have transferred to the trust will no longer be under you control. If you continue to treat the trust’s assets as your own, SARS and creditors will see it as a ‘sham’ trust, which can lead to an investigation. If found to be the case, the assets in the trust may be taxed as if held in your name when you pass away.
• Higher taxes
  All income retained by the trust will be taxed at a flat rate of 45%. All capital gains made and retained by the trust will be taxed at an effective rate of 36%.
• The costs of transferring assets into a trust can be high
  You will need to seek appropriate advice in terms of the costs associated with establishing a trust and transferring assets to the trust. As an example, there are costs associated with establishing the trust, capital gains tax when you dispose of assets to the trust, transfer duty on transferring immovable property to the trust, donations tax if you donate the assets to the trust and other tax considerations if you were to consider selling assets on loan account instead of donating them to the trust.

Finding suitably independent and reliable trustees is critical
It is essential to have independent, third-party trustees who are committed to the interests of the beneficiaries of the trust. Otherwise your loved ones may not benefit from the trust the way you intended them to.

It’s important to get professional advice when deciding which trust structure to use
This article highlights some of the key differences between a testamentary trust and an inter vivos trust. It also highlights some of the complexities associated with trusts and why it is so important that you seek professional advice to help you decide which type of trust will be best for your circumstances.

Please speak to your wealth manager if you would like to arrange a meeting to discuss your unique situation with your regionally located fiduciary specialist.