What is a Trust?
A trust is a legal institution in which a person, known as a Trustee, holds or administers property, movable and/or immovable, separately from his own, for the benefit of the Beneficiaries of the trust, or for the furtherance of a charitable or other purpose.
A trust is created by the Founder who has the intention to create a trust. The Founder will transfer ownership, and therefore control, of some, or all, of his assets to the trust to be managed by the Trustees. The Founder can also be a Trustee and/or a Beneficiary to the trust created.
The trust, and the Trustees’ powers, are governed by the trust document itself, which is registered with the Master’s Office, as well as the Trust Property Control Act 57 of 1988, as amended from time to time.
The trust document also sets out the details of the Founder, the initial Trustees and the details of the Beneficiaries. It will also set out, among other things, the name of the trust, and the purpose of the trust.
A trust does not have a legal personality in the full sense of the word as it is simply an accumulation of assets. However, despite its lack of legal personality, a trust can have legal capacity as the Trustees of the trust may perform juristic acts as long as the trust deed allows for it, for example buying a property.
A trust will terminate by written agreement on the date set out by the Founder or upon the achievement of the trust objective or on the realisation of the impossibility of the achievement of the trust objective. On dissolution, the trust assets will devolve as set out in the trust deed.
Types of Trusts
There are two main types of trusts:
- Inter vivos Trust (a trust between living persons), which is created during the life-time of the Founder
- Testamentary Trust (mortis causa), which is created in terms of a will and only comes into existence on the death of the testator of the will in which it was created.
Advantages of a Trust
A trust is a long-term structure which can be used to protect assets from generation to generation as well as ensure continuity of ownership.
From an Estate Planning perspective, a trust has the following advantages:
- It enables the Founder to divest himself of his assets;
- The Beneficiaries of a trust do not normally have a vested right to the trust assets. These assets will therefore will not form part of their respective estates;
- As a trust is not a living person, it cannot have an estate for estate duty purposes. As a consequence, the assets of the trust are not taxable under the Estate Duty Act;
- A trust can also lead to substantial savings on the Estate Duty of an individual. Let’s explain by example: if a property is sold to a trust, the purchase price owing to the Seller can become a loan account in the books of the trust. On the Seller’s death, it is only the loan claim against the trust which will form part of the deceased Seller’s estate. The growth in the value of the asset that will take place within the trust does not form part of the Seller’s estate and will therefore not attract Estate Duty.
However, due consideration must be given to section 7C of the Income Tax Act, whose objective is to tax loans by related parties (founders, beneficiaries etc.) to the trust, if these loans attract interest at a rate lower than the official rate of interest. This provision seeks to address the avoidance of estate duty and donations tax. Therefore, before entering into such a loan, it is strongly advised that you consult with an expert in tax.
Once your property has been transferred to a trust, that property no longer forms a part of your personal estate. The assets are therefore protected in the event of a subsequent liquidation, sequestration or divorce. There are, however, certain rules surrounding time frames that must be kept in mind.
Disadvantages of a Trust
Like anything, there are also disadvantages to the use of a trust. A few are listed below:
- A trust is often slow to make decisions as all the Trustees normally have to be involved in the decision making – this will depend on the terms of the particular Trust Deed;
- Legislation could in future limit the benefit which trusts currently enjoy;
- The costs involved in administering a trust; and
- The loss of control by the Founder of the trust assets sold or donated to the trust as the control thereof vests in the Trustees on transfer and no longer in the Founder.
In summary, a Trust can serve a variety of purposes and can play an important role in estate planning. However, it is important to also seek specialist tax advice along with advice from your attorney as each person’s circumstances and needs are different. Should you require any further information, please contact us.