There are two basic types of trusts: Testamentary trusts and intervivos (or living) trusts.
* Testamentary trusts:
A testamentary trust comes into being on the death of the owner of an estate. The founding document of the trust is contained in the last will and testament of the person who has died. The trust may contain cash, moveable or immovable assets and is administered by trustees who are appointed in terms of the will. Beneficiaries of trusts may be both capital and/or income beneficiaries.
The driving force and rationale of a testamentary trust is that it allows for better management and control of assets (eg where there are minor children).
* Intervivos (or living ) trusts:
An intervivos trust is established during your lifetime. The founding document is the trust deed, which needs to be registered with the Master of the Supreme Court.
The person who makes the initial settlement (provides the initial amount of money) to get the trust going is called a Settlor. In most cases this is not yourself.
Syfrets general manager John Kinsley says you need to establish an arms-length position when the trust is created for a number of reasons. Among other things it allows you, as the person wanting to establish the trust, greater freedom in your decisions with regard to the trust in the future.
The trust is administered by trustees appointed in the trust deed. Kinsley says it is best to have at least three trustees - the estate planner (yourself), another family member (eg your spouse), and an independent third party, who has the expertise but is independent.
This is someone like a lawyer, an accountant or the representatives of the financial institution which does estate planning.
Kinsley says beneficiaries of an intervivos trust can be income and/or capital beneficiaries, but where you, as the estate planner, are both an income and particularly the capital beneficiary, you can run foul of the law.
Kinsley says it is absolutely vital that in setting up a trust an expert is used as there are many pitfalls which could frustrate you at a later stage.
Putting your assets in an intervivos trust:
Assets can be transferred a number of ways. These include:
* The outright sale where a trust purchases the assets at market value;
* A donation from you to the trust, but the donations can be taxed if they exceed R25 000 a year;
* The assets can be sold to the trust on an interest-free loan basis. This is the most common approach. The asset becomes a possession of the trust. In return you have a claim against the trust in the form of a loan account. In other words say you had assets valued at R800 000 now that you transferred to an intervivos trust, the trust would then owe you R800 000.
The loan can be reduced by you and your spouse each donating R25 000 a year to the trust.
If the loan amount is not written off by the time you die this is not necessarily disastrous as you can use the R1 million abatement on death duties to write off the remaining amount.
The advantages of an intervivos trust:
The value of your assets grow in a trust which means that at your death no tax is levied on the assets in the trust. The result is your beneficiaries do not see their inheritance going into the hands of the taxman. And while you are alive you can still be a beneficiary of your assets.
Example:
WITHOUT A TRUST
Current Assets ValueR800000
Value at deathR6000000
Less abatementR1000000
Taxable EstateR5000000
Tax at 25 percentR1250000
Heirs ReceiveR3750000
Estate duty will again have to be paid by the heirs.
WITH A TRUST
Current Assets Value Transferred to Trust Paid for by a LoanR800000
Value of Assets Trust at DeathR6000000
Value of Assets in Estate Planer (Original Loan)R800000
Taxable EstateR800000
AbatementR1000000
Tax payable Zero
THE PROS AND CONS
ADVANTAGES OF A TRUST
* Estate planning: This is the primary advantage, allowing for proper management and control of your assets after you die;
* Tax planning: These advantages should be secondary and seen as a bonus and not as the primary motive. Alarm bells should ring if tax planning is the primary motive for a trust;
* Preservation of assets after death: The ongoing management of your assets, including contractual arrangements;
* Protection of assets from creditors and spendthrift children: Vulnerable spouses, particularly in the case of a second marriage, and vulnerable children can be protected;
* Impartiality: You can expect the decisions of the third (professional) trustee to be impartial, not favouring any one beneficiary, particularly after your death; and
* Flexibility: Trusts provide wide choices giving flexibility if the political or economic situation changes significantly.
DISADVANTAGES OF A TRUST
* Perceived loss of control: You no longer have total control of your assets. Your protection lies in the wording of the trust deed;
* It is an entity which is registered and can be accessed by the authorities. It is not a place to "hide grey money";
* Bad choice of trustees: If trustees are only rival heirs there can be problems. This is why you need an independent party;
* Possible future tax changes: An example is the recommendation of the Katz commission that growth in the capital value of assets be taxed at regular intervals. This is called a generation-skipping tax.