TYPES OF TRUSTS, ADVANTAGES AND DISADVANTAGES

There are a number of ways how trusts types in South Africa can be classified.  This includes the following classifications: A combination of both vested and discretionary rights are also possible.For tax purposes the following types of special trusts are recognised:The various ways of describing trusts are not mutually exclusive. For example, an Inter vivos trust can be both a Special Trust Type A and a discretionary trust; and a testamentary trust can be both a Special Trust Type B and a discretionary trust. 
 

ADVANTAGES OF A TRUST:

ESTATE PLANNING

One of the primary advantages of an inter vivos trust is that it offers you tax efficient management and control of assets now and after your death. The growth in your estate is “pegged” and the value will increase in the trust. A trust creates an entity that owns assets outside your personal estate, consequently excluding these assets from estate duty.
 
Taxes and costs can be saved, through proper structuring, as an individual will be liable for the following costs and taxes upon death:
 
1. Estate Duty (maximum 25% of Estate).  
2. Capital Gains Tax (18%).  
3. Executor's Fees (at 4.025% of the Gross Estate). 
4. Conveyancing fees on immovable property.
 
A trust will ensure uninterrupted access to capital and income after the death of an individual. The trust's bank accounts and cash reserves of the trust will not be frozen during the winding up of the individual's estate, which can take up to two years.
 

RISK PLANNING

Through proper structuring, protection of assets against creditors can be achieved.
The major risk categories are: 

LEAVING A LEGACY

 
TAX PLANNING

There are many tax advantages of properly structured entities.
Please contact us for tax structuring advice based on your personal needs.
 

DISADVANTAGES OF A TRUST:

LOSS OF CONTROL
The settlor will lose control of the underlying assets. To set up a valid trust, a settlor must intend to and actually transfer legal (although not beneficial) ownership of the trust assets to the trustees. This means that the trustees then must administer and control the trust assets. The security the settlor then has regarding the management of the assets is that the trustees are legally bound to comply with the terms of the trust deed and with their fiduciary duties.

This means that the trustees may only distribute assets to the beneficiaries as defined in the trust deed, and in the manner it prescribes. They are also obliged at all times to act in the best interests of the beneficiaries.


TAX PLANNING

Higher tax rates apply to income and gains retained by the trust. Capital gains tax is payable in the trust at an effective rate of 36%, and there are no abatements. Income retained in a trust is taxed at 45%. However, accurate application of the anti-avoidance provisions and income splitting can facilitate overall tax savings rather than additional tax.
 

COST TO TRANSFER ASSETS

Taxes and costs incurred in setting up the trust and transferring the assets to it. You need to assess whether these costs are outweighed by the long-term benefits.


ADMINISTRATIVE COSTS

Establishing a trust generates additional administrative costs and complexity in your affairs. It can be difficult to find dedicated and knowledgeable independent trustees. And if not set up and administered properly, you run the risk of the trust being regarded as a sham (or as not having been established in the first place), in which case the benefits of asset protection may be lost.


CONCLUSION

In summary, trusts are not appropriate for everyone. However, if set up and administered properly, they provide substantial advantages which could benefit you and your family.

Make sure you obtain expert and independent advice before making the decision. Please contact us for advice based on your personal needs.