Trusts are a wonderful tool when used in the right context.
Trusts originated in 11th-century England during Norman times. They became popular during the Crusades, where a father would entrust his assets to a friend for the benefit of his sons before departing, often never to return.
Essentially, the trustees held ownership of the assets on behalf of the beneficiaries until they reached the age at which they could take possession of them.
Over the years, trust law has evolved from English common law. In the last century, trusts were often used to avoid tax and to shield assets. However, over the past few decades, trusts have returned to their primary purpose, trustees managing assets and income streams for the benefit of beneficiaries, in line with the founder’s instructions as set out in the Trust Deed. Setting up the Trust Deed correctly for the intentions of the Founder is of utmost importance.
The Three Main Types of Trusts in South Africa
1. Testamentary Trust
These are the most affordable to set up, created through the execution of a deceased person’s Will. They are particularly useful for beneficiaries who are underage or considered too young to responsibly manage an inheritance.
For as long as there is a minor beneficiary, the Trust will benefit from favorable tax rates.
Testamentary trusts usually have a short lifespan and end once specific objectives have been met. While they are inexpensive to set up, they still incur ongoing running expenses.
2. Inter Vivos Trust
Also known as living trusts, these can take the form of a simple family trust or a trading trust. They are often used to protect assets from creditors and for wealth preservation, allowing the beneficiary to use assets without having direct ownership of them.
They are more expensive to establish, as the trust deed can be complex. However, they can endure for a long time.
3. Special Trust
Designed for individuals who are mentally or physically disabled, these trusts qualify for special tax status. Instead of being taxed at a rate of 45% (applicable to normal trusts), they are taxed on a sliding scale similar to natural persons, currently ranging from 18% to 45%.
The main drawback of trusts is administration, which is now as complex as, if not more complex than, the administration of a Company.
The minimum typical costs of holding a simple trust with Pinto Russell Trusts and Estates are as follows:
• Setup fees (including the Trust Deed), from R10,000 upwards
• Running costs (which include mandatory meetings and administration work), from R6,000 per annum
• Tax representation/submissions, from R4,000 per annum
• Accounting and Annual Financial Statements, depends on the complexity
These are the absolute minimum costs and can be considerably higher depending on circumstances and complexity.
A trust can be an effective vehicle for high-net-worth individuals (with assets of R25 million and above) to transfer wealth across generations, protect assets from creditors, minimize estate duty, and ensure controlled distributions to beneficiaries. Key benefits include “pegging” the value of growth assets in the founder’s estate, ensuring future growth occurs in the trust, and allowing for continuous wealth preservation and management for future generations without the assets forming part of the beneficiaries’ estates.
Trusts are still a valuable financial tool, provided they are not misused and are carefully created and run effectively and efficiently.
Living Annuities as an Alternative
If the situation is not complicated, a Living Annuity may serve as a good alternative to a simple trust.
For smaller amounts of capital, Living Annuities may provide many of the benefits of a simple trust without the costs and tax complications associated with a Trust.
Although the income from a Living Annuity is taxable in the hands of the owner, any gains (interest, dividends, rental income and capital gains) made within a Living Annuity are exempt from all taxes.
Living Annuities are particularly effective in estate planning. They fall outside of the Estate and can be distributed to the beneficiaries before the letter of executorship is issued, which alleviates cashflow constraints. A Living Annuity is not subject to executor fees nor estate duty and still offers protection from creditors too. Wealth can therefore be transferred seamlessly and tax-efficiently, whilst making significant savings.
The one drawback is that the beneficiary may opt to cash out the Living Annuity rather than continuing with it (even if the beneficiary is under 55). However, several of our young clients have opted to keep their annuities from their parents. “It is the gift that keeps on giving”.
Get financial advice before embarking on setting up a Trust. Whether you trust or not trust, you may be able to keep life relatively simple, a recipe for good living!
Nick Russell
Certified Financial Planner CFP®
Please note: This article does not constitute advice