Accountants, attorneys and tax consultants sometimes recommend to their clients that a trust may be a suitable entity for them to use for the particular situation being discussed.
Clients nod their heads at this advice but, on leaving their advisers' offices, often wonder exactly what a trust is all about.
So let's examine some of the who, what, when, where, how and why of trusts.
Firstly, what is a trust. Generally a trust is created by the founder (or donor) who provides certain assets to the trust. These are to be administered by the trustees for the benefit of the beneficiaries.
The identity of the various parties (founder, trustees and beneficiaries) will depend on the purpose for which the trust has been created.
Traditionally, trusts were created to hold certain assets for the benefit of minor beneficiaries or beneficiaries whom the founder thought might be irresponsible.
The assets were administered to ensure that the beneficiaries obtained the maximum benefit from the assets.
An example of such a trust would be one which comes into existence on the death of the family breadwinner who entrusts the management of the family's assets to level-headed trustees for the benefit of his or her family.
These days trusts are formed for a broader range of uses. They may be used to:
* Limit the impact of estate duty;
* Protect assets from potential seizure by creditors; and
* To act as the vehicle for trading transactions instead of a partnership, CC or company.
The versatility of trusts lies in the fact that the founder determines the rights and obligations of the trustees by setting down his requirements in the trust deed.
The trust deed regulates the powers of the trustees, names the beneficiaries and sets out the founder's wishes relating to the distribution of capital and income to beneficiaries.
Equally, however, the versatility of trusts means that it is vital that if you wish to form a trust you should seek professional advice from both an attorney and a tax consultant to ensure that the objectives which you seek to achieve will result as a consequence of the wording in the trust deed. For example, minor differences in wording can mean that a founder either will or will not be subjected to estate duty on assets provided to the trust!
On forming a trust, the trust deed must be registered with the Master of the High Court, who must also approve the trustees. The trustees may not act on behalf of the trust until they have been authorised to act as trustees by the Master.
A donation, albeit nominal in some instances, must be provided, and a bank account opened.
When donations or low interest loans have been provided to the trust by a person who wishes to save estate duty, the donor must be aware that certain income tax implications may arise.
Good advice may be able to reduce or remove potential tax liabilities by ensuring, for example, that distributions are made to beneficiaries who enjoy a lower tax rate.
Trading trusts may be useful and have often been used for holding and renting property. It must, however, be remembered that the transfer duty payable by a trust when it buys fixed property will be 10 percent.
An additional benefit to trading in trusts is that no STC (secondary tax on companies, payable on dividend distributions from companies and close corporations at 12,5 percent) is payable on distributions from trusts to their beneficiaries.
In its Fourth Interim Report, the Katz Commission made certain recommendations to counter generation skipping devices. If these are implemented the benefits relating to trusts may significantly change.
It is clear, from the above, that trusts must be fully understood by any person using them in order to ensure that the sought objectives are achieved.
It is advisable to seek professional advice and to ask questions. The adviser will be only too happy to know that what is being created will satisfy the client's needs without unpleasant surprises later.