Trust as a planning tool

In the world of financial planning, we have various ways of structuring and implementing strategies which are tailor-made to our clients’ individual set of circumstances.

A trust can be a useful tool, but is certainly not a “one size fits all” solution.

Let’s take a look at the nature of trusts and when they may become applicable.

There are two types of trusts

  1. Inter Vivos Trust: Created during one’s lifetime.
  2. Testamentary Trust: Created upon one’s death as per a Last Will and Testament.

A Founder is the person that creates the trust by transferring his/her assets into the trust. The structure of the trust depends on whether the Founder intends on transferring ownership of the assets onto the trustees or the beneficiaries.

  1. Discretionary Trust
  • Also known as a Discretionary Trust, in terms of which the Trustees have discretion when distributing income or capital to the beneficiaries in a fiduciary capacity;
  • Ownership of the trust assets in a fiduciary capacity is bestowed upon the trustees for the benefit of the beneficiaries.
  1. Bewind Trust
  • Also known as a Vesting Trust in terms of which the beneficiaries have vested rights to the income, capital and assets of the trust;
  • Ownership of the trust assets is transferred to the beneficiaries, but control and management of the assets is given to the trustees.

The transfer of assets into a trust can incur Capital Gains Tax and or Transfer Duty.

The recent introduction of Section 7C of the Income Tax Act on 1 March 2017 has had a profound impact on the use of trusts as estate planning tools.  Previously, any loan, advance or credit made to a trust by a founder, trustee, beneficiary, relative of a beneficiary or company relating to those persons, could be interest-free. With the introduction of Section 7C all loans, past and present must be charged at a rate of 8% per annum.

That said, trusts still offer other benefits and the introduction of Section 7C should not detract from their efficacy.

If you need to protect assets, build a legacy for future generations, provide for beneficiaries or implement estate planning, then an Inter Vivos Trust might very well be a suitable tool.

The intention, structure and conditions of the trust are set out in the Trust Deed and the trust is lodged at the Master of the High Court where a trust registration number is issued.

The Founder can be a Trustee and a Beneficiary of the trust, however there should, as a rule of thumb, be at least two other Trustees to ensure that the control of the trust does not reside in the Founder. We would recommend at least one of the Trustees is a Professional Trustee, thereby ensuring that the trust is run objectively and according to the trust deed.

There are several disadvantages to trusts, some of which include: the taxes mentioned above, administration costs of setting up the trust; the ongoing annual administration fees; accounting and auditing fees; higher rates of taxation; and the absence of rebates and annual or lifetime deductions or exemptions which would otherwise be applicable in one’s personal capacity.

A Testamentary Trust is created upon the death of a testator and the conditions or deed of the trust are included in the Last Will and Testament. They can be Discretionary Trusts or Bewind Trusts.

These trusts are typically created for the distribution of inheritance to minor beneficiaries or those beneficiaries who have not attained a certain age – or for a beneficiary with special needs, such as a physical or mental disability.

Testamentary trusts created for minors until they attain age 21, or trusts created for disabled persons, are classified as Special Trusts. They are registered at SARS as such and their income is taxed at the rates applicable to individuals excluding rebates. This is favourable as a trust’s taxable income is taxed at a flat rate of 45% as opposed to individuals who are taxed between 18% and 45%.

Each client’s needs and planning objectives are different; therefore, each estate plan and financial plan is unique. Due to the complexity of financial planning, we would recommend that clients consult with us before embarking on any kind of trust planning exercise.

If you would like to discuss your fiduciary and financial planning needs, please contact us and we will arrange an appointment.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

Gemma De Luca
FPM Risk and Wealth Management
011 778 9300