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
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:
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
What you should consider when appointing 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:
How it works
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.
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