There is a wide variety of trusts recognised under South African Law. A distinction is drawn between a trust created in a last will [a testamentary trust] and one created while the planner is alive [an inter vivos trust]. All trusts have a founder [the testator or donor], trustees and designated beneficiaries [or a defined class of beneficiaries].
An inter vivos trust is probably the most useful and common vehicle in estate planning. As an artificial entity [not a natural person] it does not “die” and hence the assets it “owns” are not exposed to estate duty. A trust provides succession of benefits from one person to the next, without having to transfer ownership of the underlying assets. After a trust is created assets are generally transferred to it by way of sale in exchange for a loan account [a fixed debt due by the trust to the seller]. The value of the seller’s estate remains fixed while the assets sold are free to grow in value without the growth attracting the estate duty it would have in the original seller’s hands.
The advantages of trusts include: –
- structured succession planning;
- protection from personal and business creditors;
- preservation of assets against unwise utilisation by prodigal heirs;
- a viable solution to the problem of splitting a farm among heirs;
- pegging of personal estate values with resultant estate duty savings;
- splitting of income tax liabilities to minimise tax; and
- flexibility to cater for unforeseen future events.
The disadvantages of trusts include: –
- added complexity in running your financial affairs;
- costs of formation and administration [it must maintain proper financial records]; and
- a loss of personal control [the trustees must manage the trust under the terms of the deed or last will];
It is essential to do a proper cost / benefit analysis in determining whether a trust is appropriate to you. Care needs to be taken in deciding which assets can conveniently be transferred to a trust and at what cost. A properly designed trust will also cater for easy and inexpensive termination should future legislation remove the advantages they enjoy.