The primary reason for setting up a trust is for protection of your assets. A trust will protect the assets and hard-earned wealth that you have accumulated and will ensure that your legacy is preserved for future generations.
Not only can trusts be useful for asset protection purposes, if the creditors of the beneficiary are prevented from reaching the trust’s assets, but trusts can also be useful for many other purposes, including reducing estate taxes and managing property for a beneficiary when direct ownership will not be beneficial. It can also be used to protect your business assets from falling into the wrong hands.
Why use a trust as an asset protection vehicle?
A trust is used to protect assets and to ensure that only the nominated beneficiaries benefit from using the assets if something happens to the trust founder. A trust is a juristic entity and completely independent of the trust founder, which means that the trust founder is no longer the owner of the assets once they are transferred to the trust.
Some of the benefits of using a trust are that:
- The assets are always protected from any claims from family members at the time of the death of the trust founder;
- Trusts can exist in perpetuity and provide continuity through generations;
- If the trust founder passes away, the assets in the trust do not form part of his/her deceased estate and are not included in the calculation of his/her estate duty (which can be quite costly);
- The assets in the possession of the trust cannot be seized if the trust founder becomes insolvent or if he/she owes any money to creditors – this also protects business assets from creditors;
- The value of an asset, such as property, grows in the trust rather than in your personal estate which can be to the trust founder’s advantage tax-wise;
- A trust can be used to ensure the trust founder’s surviving spouse receives lifelong maintenance, or to care for under-age minor children and special needs beneficiaries;
- Family Trust Deeds are not public documents and a cannot simply be accessed and viewed by the public.
How do you establish a trust and how do you get the assets into the trust?
Every trust is unique. A trust deed must be drawn up stating who the founder is, who the trustees are and who the beneficiaries of the trust will be. The trust deed will also set out the purpose of the trust, the rights and obligations of the trustees, and when the trust will come to an end.
The trust is then registered with the Master of the High Court in the area where the founder ordinarily resides or where the assets are located. Any changes to the trustees or to the trust deed must be approved by the Master, who also has the authority to check up on the administration of the trust.
Once the trust is registered, the trust may, through the trustees, purchase the founder’s property and other assets, or any other assets it deems fit. There will be transfer duty payable to the South African Revenue Services if assets are purchased.
However, usually a newly established trust will not have any funds to purchase assets and the assets will simply be donated to the trust by the trust founder. However, it is important to remember that this transaction will not be tax free. Donations tax will have to be paid based on the value of the assets.
It is important to understand the tax implications of trusts and how they differ from that of an individual. In most cases, a trust will pay a higher tax rate than an individual taxpayer.
We always advise that when you are thinking of establishing a trust, you should consult with a lawyer and obtain financial advice before proceeding. Lawyers and financial advisors will be able to explain all the implications of the use of a trust and will evaluate whether it is the preferred vehicle based on your personal criteria and needs. While a trust can be a highly effective vehicle to manage assets, it will not meet everyone’s needs.
Feel free to contact our trust experts for further guidance.