Description of a trust

A trust can be described as a legal relationship which has been created by the founder who places assets under the control of trustees. This either happens during the founder’s lifetime (inter vivos trust) or at the death of the founder (testamentary trust). This article will focus on the advantages and disadvantages of an inter vivos trust.

 
COMMON TYPES OF TRUST

Testamentary trust: one set up in terms of a will. The will serves as the trust deed and names the trustees.
 
Living (inter vivos) trust: one set up during the lifetime of the donor. The donor transfers assets into the trust, which is managed by the trustees on behalf of the beneficiaries.
 
Special trust: also known as a special needs trust, this is one with a special purpose, which qualifies it for a lower rate of taxation. There are two kinds:
 

• Type A: A living trust that is set up for the benefit of an incapacitated or disabled person – child or adult – who cannot look after his or her own financial affairs.
• Type B: A testamentary trust that benefits relatives of the deceased who are minors. Both kinds of special trust are taxed at the rate applicable to individuals (between 18 and 40 percent), instead of the rate applicable to trusts (40 percent).
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Advantages of a trust

 
Reducing estate duty
 
Inter vivos trusts can be used to minimise estate duty. No estate duty should be payable on assets owned by the trust as a trust does not die. Estate duty is currently taxed at 20%.  This estate duty saving can be substantially large especially for high net worth individuals who are worth millions of Rands.
 
Protection against creditors
 
As the trust’s assets are not owned by the beneficiaries, creditors do not have a claim on the assets. This advantage is especially important for people who have exposure to potential liability. Companies as well as individuals are able to transfer assets into trusts.
 

• They preserve your assets after your death.
• They can exist in perpetuity and provide continuity through generations.
• The assets are separate from your name.
• They can protect beneficiaries from themselves – for example, in the case of a spouse who is inexperienced in managing money.
• They can protect business assets from creditors.

 
Because a trust is not part of your estate, it can save you costs and taxes: there is no estate duty (see “Estate duty”, below) on trustees and therefore no fees for winding up an estate, including costly executor’s fees.
 
The value of an asset, such as property, appreciates in the trust rather than in your personal estate. This can be to your advantage tax-wise.
“Assets that tend to appreciate over time may be sold or donated to the trust (subject to annual donations allowances under the Income Tax Act). Any increase in the value of the asset/s you transfer to the trust will be excluded from your estate. The value is therefore ‘frozen’ on transfer to the trust and all the future growth on that asset’s value will now take place within the trust and not the personal estate,”
 
Although taxes on living trusts are high, money can, through the “conduit principle”, flow to beneficiaries without attracting tax within the trust. (For an explanation, see “The conduit principle”, below.)

 
THE CONDUIT PRINCIPLE

Income in a trust that is not a special needs trust is taxed at 40 percent. But unlike companies, which are taxed on total gross income, trusts are taxed where the income is vested. “Provided trustees push the income down to beneficiaries within the same tax year, the income will retain its nature and be taxed in their hands at their tax rate,”
 
An example: The trust receives income of R500 000. You have three minor children, each of whom is entitled to R70 700 tax-free (the income tax threshold according to the 2014/15 tax tables). The remaining R287 900 is paid into your private company, also a beneficiary, which is taxed at 28 percent. The result is that only R80 612 (16.12 percent) goes to tax, as opposed to R200 000 if the money had remained in the trust.

ESTATE DUTY

Your estate is entitled to an abatement of R3.5 million. This means that there is no estate duty on an estate worth R3.5 million or less. There is duty of 20 percent on amounts over R3.5 million. If your estate is worth R4 million, for example, the duty would be 20 percent of R500 000, which is R100 000.
 
If your spouse inherits any portion of your estate, that portion is exempt from estate duty. The estate of the second-dying spouse enjoys any unused portion of the first-dying spouse’s abatement of R3.5 million, so on his or her estate, an amount of up to R7 million can be free of estate duty.
 

Advantages of a Business / Holdings trust as a legal entity

Trusts have been used for many years to protect the assets of its beneficiaries, but it can also be used as a format under which to conduct business. Structured correctly, it can be the most practical and appropriate legal entity for your venture.
Choosing to set up your business within the legal framework of a business trust affords certain protections and advantages that other legal entities do not. We look at these very briefly in this article, so it's important to speak to a trust attorney about your specific needs.
A business trust is defined as a trust where the trustee uses the trust assets to do business for profit in order to benefit the trust beneficiary or to further the aims of the trust. A trust may have no more than 20 trustees.

A business trust has the following advantages

• The trust protects your assets against personal creditors, because the assets of the trust belong to the trust alone. This means that creditors cannot claim against your personal assets
• The admin costs of a business trust are less than that of a company or CC. For example, a trust is not legally required to hire an auditor, disclose financial statements, pay annual fees to the Registrar, and so on.
• Taxes related to trusts are less complicated with regards to Income Tax, Capital Gains and the various documents that have to be submitted to SARS, for example.
• It is cheaper and easier to dissolve a business trust than a CC or company.

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