Trusts: An overview
By adriaan visser In Latest news
Keywords and Phrases Explained
Settlor, Donor, Founder or Planner: This is the person who initiates the creation of the trust. This is also usually the person who bequeaths assets or property to the trust. Although the definition of these terms differ slightly they are used interchangeably.
Trustee: This is the person who manages and administers the trust on behalf of and to the best advantage of the beneficiaries. Trustees are regarded to hold the assets of the trust on behalf of the trust and the beneficiaries but full ownership does not vest in the trustees at any one time. Trustees only have what is known as bare ownership of the trust assets.
Beneficiary: The person or persons that has a certain right pertaining to the income and the capital of the trust. The right of the beneficiaries can only be determined by examining the trust deed. Mostly trusts are of a discretionary nature which means that the right of the beneficiaries may only be determined by the sole and unfettered discretion of the trustees. Such a trust is known as a discretionary trust.
The Master: The Master of the High Court is responsible for keeping and filing of trust deeds and to issue letters of authority which brings the trust itself into existence. The powers of the Master are conferred on it in terms of the Trust Property Control Act.
Trust deed: The trust deed is the written document that provides the nature and object of the trust and in terms of which the trust itself is established.
There are two types of trusts and are known as an inter vivos trust and a mortis causa trust.
Inter vivos trust directly translated means a trust between the living. This is the form of a trust that is used for family trusts, property and charitable trusts. This trust is created by means of the trust deed during the life time of the founder. The trust is usually funded by means of donation or loan. The inter vivos trust is used in estate planning, tax structuring and the protection of assets.
A mortis causa trust directly translated means a trust between the dead and the living. Such a trust created upon the death of a testator and is provided for in the deceased will. This trust not registered while the testator is still alive and only when the testator dies. The need of such a trust arises from the need to protect beneficiaries such as minor children.
REASONS FOR THE USE OF A TRUST
- Freezing the value of your estate
One of the most popular reasons to make use of the trust instrument is to “peg” the value of your assets and to freeze the value of your estate. Once assets are held in a trust the value and the growth of these assets no longer contribute the size of the donor’s estate. This will ensure that the donor in his personal capacity does not accumulate any assets and the possibility to pay estate duty can be completely removed. Assets can be moved into a trust by way of a donation or by way of a loan account.
- Protecting a surviving spouse
In situation where there is concern that a surviving spouse has limited financial skill or knowledge, a trust can be used to protect the surviving spouse from being taken advantage of.
- Protection of minor children
Minor children can also be protected in the same way a surviving spouse can be protected by the use of a trust. Bequeathing benefits to a trust that would go to minor children can also avoid that such benefits are administered by the guardian’s fund.
- Perpetual succession
The use of a trust also provides for continuity in succession of your assets. Should the donor or planner pass away, the trust will continue “living” and the assets that the planner left behind will not fall within such a person’s estate. This will ensure that the heirs are entitled to enjoy unrestricted use of their benefits while the estate of the planner is being wound up after his death. The assets in this trust will continue for many generations to come provided that the trust is structured and managed properly.
Furthermore, the will of a deceased person becomes a public document upon his death. The trust is seen as a private vehicle and is not open to public scrutiny.
- Insolvency of beneficiaries and claims by creditors
Trust property does not form part of the personal estates of beneficiaries until such property has vested in the beneficiary. This means that it will only form part of the estate once such a person actually receives a benefit. In a discretionary trust, this only occurs when the trustees execute decision to distribute funds to a beneficiary.
Most inter vivos trusts are what is known as discretionary trusts. This means that the trustees have the absolute power to choose which beneficiaries should receive benefits. These assets are therefore protected from the claims of creditors against beneficiaries.
Assets are also protected from the founder’s creditors provided that the founder or donor was solvent at the time of settling assets into a trust.
- Tax implications
Income tax
In certain circumstances, income from a trust can be split between spouses and various other beneficiaries and will in turn reduce tax liability as a result. However tax legislation could prevent this to a certain extent and cause that these benefits be taxed in the hands of the donor.
It must be expressly noted that the use of a trust should never be solely for tax purposes but rather as a tool for responsible estate and legacy planning.
Estate duty
The estate duty act provides for a primary abatement of R3.5 million in a deceased estate. This means that all assets in an estate in excess of R3.5 million will be taxed at a 20% rate. Any person planning for his estate that has or reasonable foresee to have assets to exceed the value of R3.5 million should consider the use of a trust. It should also be noted that the abatement of spouses may be combined to qualify for a total abatement of R7 million.
Donations tax
Settlement of assets to a trust can take place either by means of a donation or by way of selling the assets to the trust.
Selling assets to the trust is a convenient way of moving assets to a trust when the trust does not yet have the capital to purchase assets. A loan account between the seller and the trust is created in favour of the seller which would usually also be the founder, donor or settler.
Settlements by way of donation are taxed at a 20% tax rate for amounts exceeding R100 000 per annum.
MATTERS OF CAUTION
Control by settlor
It is very important for the settlor to realize that he/she must completely relinquish ownership and control of the asset that has been made over to the trust. Section 3(3)d of the Estate Duty Act provides that property is deemed to be the property of the deceased if he has the power to dispose of such property immediately prior to his death for his own benefit or for the benefit of the estate.
The settlor has to accept that he no longer has the power to control the assets made over to the trust and that these assets should be controlled by the trustees. Trustees should enjoy absolute and unfettered control and each trustee should be allowed to make decisions without the undue influence of the settlor or other trustees.
Trustees
A trustee should be a person who is able to act with required skill and diligence that would be expected of a person un such a fiduciary capacity.
Proper consideration should be given when choosing trustees. It is important that the chosen trustees manage the trust to best possible benefit of the beneficiaries in a transparent and independent manner. The assets of the trust could be regarded as part of the planner’s estate if it is clear from the records of the trust that the trustees were not independent and only heeded the wishes of the founder or some other single person. Appointing family members or any other persons that are clearly subject to the influence of a single person that wields all the power could damage the independence of the trust and ultimately cause the trust to be regarded as the alter ego of the planner.
It has become best practice for the trust deed to provide for the requirement of an independent or professional trustee. Such a person is not a beneficiary of the trust and can’t be unduly influenced by the founder, beneficiaries or other trustees. Such person would be available to manage the administration of the trust and to provide technical advice and assistance pertaining to matters of the trust.
COSTS
The cost of establishing and maintaining a trust consists of the following elements:
a) Initial draft and registration fee
Drafting submission and initial estate plan and advice – R5 500
b) Annual administration fee
1.2% of the gross value of the assets held in the trust is regarded as the standard industry norm for the administration of a trust. However we assess each trust individually to determine this fee based on the risks involved and the complexity of the work that needs to be done. The minimum monthly fee of R350 may be charged for trusts with no assets.
- c) Ad hoc fiduciary and Master’s fees.
Submissions to the master’s office may be needed from time to time and charges will be levied according to our basic fee structure.
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