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:
- An “ownership trust”, under which the founder or settlor transfers ownership of assets or property to a trustee(s) to be held for the benefit of defined or determinable beneficiaries of the trust.
- A “bewind trust”, under which the founder or settlor transfers ownership of assets or property to beneficiaries of the trust, but control over the assets or property, is given to the trustee(s).
- A “curatorship trust”, under which the trustee(s) administers the trust assets for the benefit of a beneficiary that doesn’t have the capacity to do so, for example, a curator placed in charge of a person with a disability.
Trusts can be described in various ways:
- The way in which they are formed:
- Inter vivos trust is created during the lifetime of a person
- Mortis causa (testamentary) trust is set up in terms of the will of a person and comes into effect after their death.
- The rights they give beneficiaries:
- Vesting trust – the income (both of a revenue and capital nature) or assets of the trust are vested in the beneficiaries. The beneficiaries have the vested rights to the income or assets of the trust.
- Discretionary trust – the trustee(s) usually have the discretion whether to and how much of the income, assets or net trust capital of the trust to distribute to the beneficiaries. In these circumstances the beneficiaries only have contingent rights to the income, assets or net trust capital of the trust.
A combination of both vested and discretionary rights are also possible.
- Trusts can be used for several purposes, for example:
- Trading trusts
- Asset-protection trusts
- Charitable trusts
- Special trusts
For tax purposes the following types of special trusts are recognised:
- Special Trust Type A – a trust created solely for the benefit of a person(s) with a “disability”, as defined in section 6B(1) of the Income Tax Act, where the disability makes it impossible for the person(s) from earning enough money for their care or from managing their own financial matters.
- Special Trust Type B – a trust created solely for the benefit of a person(s) who is a relative of the person who died and who are alive on the date of death of that deceased person (including those conceived but not yet born), and the youngest of the beneficiaries is younger than 18 years on the last day of the year of assessment.
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:
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.
Through proper structuring, protection of assets against creditors can be achieved.
The major risk categories are:
- Financial risk
- Business risk
- Personal risk
- Family/Divorce risk
LEAVING A LEGACY
- A trust is an entity that will “outwit, outplay & outlast” you, and will not terminate (unless decided by the trustees). It can therefore own properties and assets for generations, and then pass this portfolio of assets to the next of kin or heirs tax free.
- In conclusion, to protect your accumulated wealth, contact us to assist in planning your lasting legacy.
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.
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.
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.
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.