Should a trust form part of your financial planning?

Only a small portion of the population is aware of the benefits of having a trust and how it can serve to protect one’s assets and ensure continuity in estate planning.

A trust is a written agreement between the founder of the trust and the appointed trustees in terms of which assets are transferred by the founder to the trust, to be administered on behalf of nominated beneficiaries. A trust is therefore a convenient vehicle that offers a comprehensive range of functions, including the protection of the interests of the beneficiaries.

Trusts became popular in South Africa for reasons mostly associated with the reduction of tax and estate duty. Trusts were set up so that individuals could benefit from strategies such as “income splitting” and the reduction of estate duty through “estate pegging or freezing”. This led to a situation where the use of trusts as tax planning vehicles overshadowed the use of trusts as asset protection vehicles.

In order to curb the use of trusts in this way, the South African Revenue Services (SARS) introduced anti-avoidance legislation over a number of years. An example of this was the introduction of section 7C to the Income Tax Act. This section deals with the treatment of loans made to a trust where the loan is either interest free or where interest is charged at a rate lower than the official rate of interest. The provisions of this section effectively treat an amount equal to the difference between interest charged at the official rate of interest and the amount of interest incurred by the trust in respect of the loan, as a donation subject to donations tax.

The effects of these types of legislative changes caused some to believe that a trust may no longer be relevant as an estate planning tool. The question that needs to be asked is whether the trust was set up as part of a comprehensive estate plan or created solely for estate duty and taxation purposes. It is important to remember that the primary reason for the creation of trusts was the protection of assets and as such, trusts remain an important part of a holistic financial plan.

There are several types of trusts, including testamentary trusts and living or inter vivos trusts. Proper education around the working of trusts is essential, as there are several ways that a trust can assist in leaving a legacy. One method is through a testamentary trust in your Will. This stipulated testamentary trust is a vehicle created in terms of a Will, which comes into existence after the death of the testator/testatrix. For example, funds bequeathed to a testamentary trust may provide for the maintenance, education and general well-being of minor children and other dependants, such as parents, employees, or people with disabilities.

It is of particular value, in many instances, to provide for a testamentary trust either at the death of a single person or at the death of the first-dying in a marriage or partnership. This will afford immediate protection of assets for your ultimate beneficiaries. This is especially important when considering that it is believed that as much as 70% of self-created wealth never reaches further than the third generation.

A living or inter vivos trust is a flexible estate planning and asset management tool that will make it easier for you to meet your objectives. It will enable you to preserve and manage your assets today, while planning wisely for tomorrow. This trust is created while you are alive, and is a flexible, dynamic entity that will grow, acquire or dispose of assets, make donations, and meet payments.

The trust deed for the living trust is registered with the Master of the High Court. There are certain costs involved, but the cost of setting up a trust and the administration thereof should be weighed against the future benefits and savings through the trust. The founder can determine the conditions and termination date of the living trust.

The advantages offered by a trust include the following:

Minimises estate duty, executor’s fees and other costs.
The smooth transfer of wealth from one generation to the next (or even multiple generations).
The protection of your assets and those of your beneficiaries from possible future relationship claims (for example, in the event of marriage and divorce).
The protection of your assets and your beneficiaries from the claims of creditors, and in the event of insolvency or failure of a business venture.
Ensuring that your beneficiaries can benefit from an asset which cannot be easily subdivided, such as a holiday home or a farm.
Keeping personal capital assets separate from business and trading assets.
Providing for your children’s future educational needs.
Protecting irresponsible beneficiaries against themselves and third parties.
Professional services from an impartial trustee with a wealth of knowledge, experience and resources.
Income benefits.
Meeting the stipulations of a divorce order.

Setting up a trust requires knowledge of both the legal principles and the framework governing trust instruments. The primary objective for setting up a trust should be based on personal circumstances – it is important to receive advice from your financial adviser when setting up a trust.

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.