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What are Trusts and how do they work?
Trusts are legal arrangements through which one person (or institution) called a "trustee", holds the legal title to property for another person, called a "beneficiary".
Within South Africa, we see that a trust has three parties in order to make up a trust: the Trustee, the founder and the beneficiaries. The trustee or trustees are the individual(s) or the organisation that controls the assets within the trust as determined by the Trust deed. In most situations the founder is one of the trustees as they are the individual and/or organisation that contributes to the trust and determines the aim. The beneficiaries are individuals who benefit from the trust and the assets in which it holds. Trusts can be used to distribute property before death, at death or afterwards, and usually has two types of beneficiaries: one that received income during their lives and one that receives whatever is left over after the stated beneficiaries pass on.
Types of Trusts
Testamentary Trusts
Testamentary trusts are the most common trusts that are used within South Africa. These trusts are suited to the protection of the interests of minors and other dependents who are not able to take care of their own affairs and only come into being after the death of the testator. This trust is formed by placing a trust clause in within your will which shall serves the same purpose as a trust deed. Testamentary trust may be a discretionary or vested trust.
Discretionary Trusts
Payment or income capital is subject to the discretion of the trustees and all non-allocated income is taxable in the hands of the trust. These trusts are specifically for individuals who are looking to protect their assets in the case of insolvency, reduce estate duty responsibilities and ensure easy succession plan. It should be known that while specified tax implications of trusts differentiate globally, the standard framework stays consistent. Capital beneficiaries can be chosen at a later stage.
Vested Trusts
The income and capital of beneficiaries are already determined and described. The income is taxable in the hands of the income beneficiary, who could also be the capital beneficiary. Therefore, the capital beneficiary has immediate property rights which is subject to the terms of the wall or Trust Act. There are fixed entitlements to the beneficiaries and less flexibility as the rights of the beneficiaries are clearly defined from the onset.
Living Trusts (Inter vivos trust)
These types of trusts are ideal for keeping growth assets out of your estate and are a superb medium to limit estate duty and to protect assets from generation to generation. A living or inter vivos trust comes into being during the lifetime of the founder with the signing and registration of a trust.
A living trust can take several forms:
- Family Trusts: This type of trust comes into being through an agreement between the founder and the trustees. Assets are sold to the trust, and a loan account is created. These assets can also be donated to the family trust, but these have donation tax implications. The trust may obtain other assets through purchases or an inheritance. This type of trust allows the management of the assets by the trustee and ensure children or beneficiaries benefit from the trust in a structured manner.
- Charitable Trusts: A charitable trust is classified as non-taxable in terms of the Income Tax Act when in compliance with same. It is a legal entity in which capital loans are made to a trust, which the trustees then make donations to charities, schools, churches etc. on your behalf and according to your wishes. Large donations can be made as this trust manages assets for the benefit of the public.
- Guardian’s Trusts: When minor children are the beneficiaries of life policy proceeds, insurers are obliged to pay this money to a natural or legal guardian to manage on the children's behalf. However, if the guardian mismanaged or misappropriated these funds your children would not get the full benefit of the money you planned for them to inherit. Thus, nominating a trust is the ideal solution.
- Special Trusts: Special trusts are taxed at the same rate as a natural person and may only be created to benefit a person suffering from serious mental illness as described in the Mental Illness Act, No. 18 of 1973, or who suffers from serious deformity. Testamentary trusts benefiting any living family member, of whom the youngest turns 21 in a tax year, may also be classified as a special trust.
Benefits of a Trust
- Protection of Assets: Creditors, legal claimants as well as divorce settlements will not have access to the assets that are placed within your trust.
- Flexibility: Trusts can be altered to meet the needs of an individual i.e. supporting of beneficiaries.
- Estate planning: Quicker and more efficient and effective transferring of assets to heirs without the mess and delays during death. Further, these assets are protected and shall not be wound up within a deceased estate.
Disadvantages of Trusts
- Expensive: The initial setting up of a trust is costly and professional advice can lead to ongoing expenses.
- Time consuming: Trust registration requires much legal drafting and planning which in turn requires time in order to get the trust up and running.
- Tax implications: A trust shall always incur tax as with any other entity, particularly pertaining to income tax.
Van Deventer & Van Deventer Incorporated. - Trust Attorneys in Johannesburg
Establishing and managing a trust is a significant financial and legal decision that requires careful planning and compliance with South African trust law. Whether you are setting up a testamentary trust to protect your loved ones, a living trust to secure your assets, or a charitable trust to leave a lasting legacy, it is essential to have the right legal guidance to ensure the trust is structured effectively.
At Van Deventer & Van Deventer Incorporated, our experienced trust attorneys in Johannesburg and Sandton provide comprehensive legal support for:
- Drafting and registering trusts in accordance with legal requirements.
- Estate planning and asset protection to secure financial stability for beneficiaries.
- Tax-efficient trust structures, including family and special trusts.
- Trust administration and compliance, ensuring all legal and fiduciary duties are met.
- Resolving trust disputes and advising trustees on their obligations.
Trusts play a vital role in estate and succession planning, offering long-term financial security and tax benefits when structured correctly. However, improper trust administration can lead to legal challenges and unintended financial consequences. This is why seeking expert legal advice is crucial to ensuring that your trust operates effectively and aligns with your personal or business objectives.
If you need guidance on establishing, managing, or reviewing a trust, contact our Trust Experts at Van Deventer & Van Deventer Incorporated. Our trust attorneys in Sandton, Johannesburg are ready to assist with all aspects of trust law, providing tailored legal solutions to protect your wealth and safeguard your legacy.