This month the topic of conversation will be trusts.
We will cover the purpose of trusts, trustees’ responsibilities and some tax aspects of trusts.
Why form a trust?
A trust is a great vehicle if you want to protect and care for yourself and your family whilst alive. It also facilitates leaving behind what you have – and what is needed – to who you want, the way you want, when you die. Additionally, it can save legal fees, administrative and court costs, and taxes to the maximum extent legally possible.
Trusts are formed for myriad reasons, but the most common are succession planning and provision for minors (usually done through testamentary or inter vivos trusts), and estate planning & asset protection (optimally achieved through an inter vivos trust).
When structured and managed correctly in accordance with the law, accounting principles and SARS requirements, a trust will enable you to take care of yourself, your spouse, and your family, protect and enhance your wealth, and, in some cases, reduce the amount of tax you pay.
Contrary to popular belief, trusts have limited tax advantages as they are taxed at the maximum rate of income tax and Capital Gains Tax (CGT). There may, however, be tax benefits for the founder and beneficiary of the trust, provided it is managed correctly. Tax planning may be achieved through vested and contingent/discretionary benefit and through applying the conduit principle. In this case, Sections 25B and 7C will come into play.
The purpose of a trust
The purpose of a trust is to hold assets and to provide for beneficiaries. A trust comes into effect when one party agrees to make over their assets to another (the trust), for the benefit of the beneficiaries. This is done either during your lifetime or after death.
There are various types of trust, but the most well-known benefits of trusts (the reasons most trusts are formed) are usually related to inter vivos trusts (living trusts). These include:
- Estate planning
- Tax planning
- Protection of assets from creditors
- Protection against spendthrift children
- Protection of a vulnerable spouse after your death
- Protection of minor and/or vulnerable children
- Income tax splitting through the conduit principle
- Multi-ownership of assets
- Impartiality and Confidentiality
- Preservation of assets after death
- Assuring rapid access to income and capital after your death
- Cost savings as assets in Trust are not subject to the fees and costs of winding up an estate
- Provides continuity in your affairs
- You can measure trustees’ performance during your lifetime
Did you know?
One important aspect that is very seldom emphasised when looking at forming trusts is the incapacity of individuals. Should an individual become temporarily or permanently incapacitated (disabled), the court may appoint a curator to look after the interests of the individual. Like executors to estates, curators are remunerated for their service. But what if the curator doesn’t act in the best interest of the individual? Should the incapacitated individual have a trust, and their assets are held in the trust, no curator is necessary to look after the financial affairs of this individual.