Successful business owners often use trusts
to limit risk but do so without any consideration as to tax and other implications or best strategy or option for their specific circumstances. In my view, this is simply due to the lack of understanding of what a trust is and how it works.
More simply put, a trust is established by a person (the founder) who donates their assets to the trust. The trustee(s) administer the trust assets for the benefit of a third party -beneficiary. Thus the very core of the trust concept is that the powers and function of the founder are separated from the trustees and the beneficiaries.
Furthermore, trusts are administered according to the provisions of the Trust Property Control Act 57 of 1988.
Although, trusts are well-known vehicles to facilitate effective estate planning and continuity planning strategies, and often the hot topic of discussion when trying to “keep up with the Joneses“, setting up a trust, whether inter vivos (between the living) or testamentary (created in a will), should be carefully considered and not just blindly implemented.
Broadly speaking; trusts are classified into 2 categories namely:
For income tax purposes however, trusts of further classified as either vesting or discretionary and determines when and by who tax is payable.
Identifying with a trust is the best solution for what you are trying to achieve and if so further identifying the correct trust for your purpose is imperative to avoid incurring unnecessary or excessive costs.
A testamentary trust is established when a person (founder) makes provision for the establishment of a trust in their will.
Accordingly, the trust does not come into existence until such time as the person creating the trust (the founder) dies.
These trusts are commonly applied where the deceased has maintenance or support obligations. For example, to look after the financial needs of minor children or disabled family members or the elderly.
This is particularly useful because in terms of South African law, a minor child may not inherit – we know provision has been made for looking after a minor child such child’s inheritance is often paid into the guardians find which is a state – owned fund.
The most important factor to take note of is that during the lifetime of the founder, the assets he plans to transfer to the trust on his death remain under his direct control and accordingly he never relinquishes such control before his death. This, in very direct contrast to the inter vivos trust.
Inter vivos Trusts
In contrast to the testamentary trust, the inter vivos trust is a trust set up between the living. So, property is transferred (before death) to the trust by its founder and managed by the for the benefit of another person or persons (the beneficiary(ies)).
Accordingly, the founder therefore relinquishes direct control over the assets. This is one of the most important considerations when electing whether or not to establish such a trust.
The fact, whether or not the founder is indeed willing to relinquish his direct control over the assets so transferred to the trust. If he/she is not, trusts are often set up in such a way as to retain the direct control of the founder which may in every to be result in the trust never been established in the 1st place, terminating or the transactions being reversed. You can find more information on this here.
Besides safeguarding personal assets from the claims of creditors, safeguarding assets or attending to the maintenance needs of dependents trusts are also particularly useful in continuity planning structures and some commercial transactions, such as BBBEE transactions . You’ll find more information on this here.
From continuity planning perspective, it may be useful to hold shares in a company in a trust in order to not only facilitate the continuation of the business because you would have been in a position to select the most appropriate people to continue with your business.
Trusts (regardless of the type) are particularly well-suited when proper purpose in implementing these have been planned and considered. However, further to considering the specific purpose and best solution, trusts are also relatively expensive vehicles. It is therefore a rule of thumb in estate planning that only non-income generating assets are best suited for this purpose.
This on the basis that the trust is taxed as a separate legal person from the beneficiaries (and trustees) in some instances and in other instances the donor (or founder – the original owner of the asset transferred to the trust) or beneficiary may be taxed, regardless of whether or not any assets or benefits were actually paid or released to the beneficiary.
Accordingly, seeking appropriate and expert legal advice before implementing a particular estate planning strategy or trust structure is imperative.