A trust can be an effective estate-planning and asset-management tool, but it is not necessarily appropriate for everyone.

Trusts are sometimes presented as a way to protect assets, reduce tax, or avoid the complications of estate administration. The reality is more nuanced. A properly structured and administered trust can serve important purposes, but it also creates ongoing legal, administrative and tax obligations.
The important question is therefore not simply “Should I have a trust?,” but rather:

“Is a trust appropriate for my circumstances and my estate-planning objectives?”

What is a trust?

A trust is a legal arrangement in terms of which assets are placed under the control of trustees, who administer those assets for the benefit of specified or identifiable beneficiaries in accordance with the terms of the trust.

The person who establishes the trust is generally referred to as the founder. The persons appointed to administer the trust are the trustees, and the persons for whose benefit the trust is established are the beneficiaries.

The trustees administer trust property in a fiduciary capacity. They are required to exercise their powers in accordance with the terms set out in the trust deed and applicable law and may not simply treat trust property as their personal property.

The administration of trusts in South Africa is principally governed by the Trust Property Control Act 57 of 1988, together with the common law and other applicable legislation.

What types of trusts are there?

The Master of the High Court distinguishes between two fundamental forms of trust:

Inter vivos trusts

An inter vivos trust is created during the lifetime of the founder. It may be used as part of a person’s estate-planning strategy to hold and administer assets for beneficiaries during the founder’s lifetime and, depending on its terms, beyond the founder’s death.

Testamentary trusts

A testamentary trust is created through a valid will and comes into operation following the death of the testator.

Testamentary trusts are frequently considered where a person wishes to provide for minor children or other beneficiaries while ensuring that inherited assets are administered by trustees rather than transferred directly to the beneficiaries.

The Master of the High Court confirms these two broad categories and administers the registration of trusts.

There are also different classifications of trusts for tax purposes. For example, SARS recognises special trusts, which can receive different tax treatment if the statutory requirements are met.

Why do people establish trusts?

There is no single reason for establishing a trust. Its suitability depends on the person’s family circumstances, assets, and long-term objectives.

A trust may be considered where there is a need to:

• provide for minor children;
• provide for a beneficiary who may require assistance with the management of assets;
• preserve assets for future generations;
• provide continuity in the management of family assets;
• hold and administer particular investments or other assets;
• facilitate longer-term succession planning; or
• establish a structured mechanism for managing assets for the benefit of particular beneficiaries.

 

A trust should therefore be established for a clear and legitimate purpose, rather than simply because trusts are perceived to offer tax or asset-protection advantages.

Do I actually need a trust?

Not necessarily.
For some individuals, a properly drafted will and appropriate ownership arrangements may be sufficient. For others, particularly where there are significant assets, complex family circumstances, or a need for long-term management of assets, a trust may form an important part of the estate plan.

There is no universal rule that every person with assets, children or a substantial estate should establish a trust.

The decision should be based on an assessment of the person’s circumstances and objectives and on whether the advantages of a trust justify the costs and administrative responsibilities involved.

Trusts and minor children

A trust may be useful where assets are intended for minor children.

A parent may not wish substantial assets to pass directly to a minor child without a mechanism for managing those assets. A trust can provide for trustees to administer the assets and apply income or capital for the child’s benefit in accordance with the trust deed.

A testamentary trust created through a will may be particularly appropriate where a person wishes to make provision for minor children after death.

The terms of the trust should, however, be carefully considered. The trust deed should provide an appropriate framework for the trustees to manage and apply trust assets while taking account of the beneficiaries’ circumstances.

Trusts for vulnerable beneficiaries

A trust may also be considered where a beneficiary is unable, or is likely to be unable, to manage substantial assets independently.

In appropriate circumstances, trustees can manage assets and apply funds for the benefit of such a beneficiary in accordance with the trust instrument.

Where a trust is being considered for a beneficiary with a disability or other particular circumstances, the structure should be carefully considered because the legal and tax consequences may differ depending on the nature of the trust.

SARS recognises certain special trusts, including trusts created solely for the benefit of persons with a qualifying mental or physical disability. Special trusts are subject to different tax rules from ordinary trusts.

How WJ Mayhew Attorneys can assist

At WJ Mayhew Attorneys, we assist clients with estate planning, trusts, and related estate matters.

We can assist with considering whether a trust is appropriate, establishing, and structuring trusts, reviewing trust arrangements and advising trustees on matters arising from the administration of a trust.

Our approach is to consider the client’s circumstances and objectives as a whole before recommending an appropriate structure.

If you are considering establishing a trust, or would like to review an existing trust, obtaining legal advice at an early stage can help ensure that the structure is appropriate for its intended purpose and that its legal and administrative requirements are properly understood.

Important notice

The information contained in this article is provided for general information purposes only and does not constitute legal, tax or financial advice. Trust law and taxation are subject to legislation, case law and regulatory requirements that may change. Each person’s circumstances are different, and professional advice should be obtained before establishing a trust, transferring assets to a trust, or taking any action based on the information contained in this article.