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Estate planning: When is it appropriate to set up a trust?

It is important to be absolutely clear on your intentions for forming the trust and what you intend the trust to achieve.

Trusts can be used to serve a number of very specific purposes in your estate plan. However, as an estate planner, it is important to be absolutely clear on your intentions for forming the trust and what you intend the trust to achieve. A trust, which is essentially a tripartite agreement between the trust founder, trustees, and the beneficiaries, can take many forms, and it is essential that the type of trust you choose is correctly set up to achieve your estate planning goals. In this article, we explore when it may be appropriate to set up a trust and what form the trust should take.

At the outset, it is important to differentiate between what is known as a testamentary trust or mortis causa trust, on the one hand, and a living or inter vivos trust, on the other hand. A testamentary trust is set up in terms of a will and is only formed upon the death of the testator, whereafter certain assets identified in the will are transferred into the trust. What is important to bear in mind is that the trust founder retains control of the assets while they are alive, and it is only on their death that the assets are transferred into the trust. Conversely, a living trust is formed by the trust founder while they are still alive following which the assets are brought under the control of the trust. This means that the trust founder relinquishes control of the assets during their lifetime.

Protecting the inheritance of your minor children

If you have children under the age of 18, setting up a testamentary trust is something worth considering. In terms of our law, children under the age of 18 do not have full contractual capacity, which can cause estate planning difficulties if you bequeath assets directly to them. Any assets bequeathed directly to minor children may be paid over to the state-run Guardian’s Fund and administered on behalf of your children until they reach age 18. To avoid this happening, you can make provision for a testamentary trust in terms of your will and ensure that any assets intended for your minor children are bequeathed to the trust. Upon your death, the trust will be formed following which your nominated trustees will take control of the assets and administer them in the best interests of your children until they reach a pre-determined age.

Providing for those who are vulnerable or who have special needs

A trust can also be used effectively to provide financially for children with severe mental or physical disabilities and who, as a result of their disability, are unable to manage their own affairs. In a situation where a child has a severe mental or physical disability, a testator can make provision for a special trust Type A terms of Section 6B (1) of the Income Tax, and appoint trustees who will manage the trust assets and protect the finances of the disabled child. A trust of this nature can be set up as an inter vivos trust or testamentary trust, depending on the specific needs of the trust founder. If the trust is correctly registered and meets the qualifying criteria, it will enjoy tax rates applicable to a natural person ranging from 18% to 45%.

Mentally disabled children are particularly vulnerable when it comes to being taken advantage of financially, and a Type A trust is an excellent way of ensuring that assets intended for their benefit are kept out of the hands of unscrupulous people. Although it is possible for the person appointed as guardian to your child to also serve as a trustee, this can sometimes result in a conflict of interests, and it is, therefore, advisable to appoint an independent person as trustee.

Managing your affairs in the event of a dementia diagnosis

Although an inter vivos trust requires that you relinquish control of the trust assets while you are alive, this can be beneficial if you are diagnosed with dementia, Alzheimer’s disease or your mental acuity starts to decline. In such circumstances, the trustees would continue to manage the assets of the trusts as per the mandate given to them in the trust deed. The benefit of this is that your loved ones will not need to apply for the appointment of a curator or administrator of your estate, and the assets remain under the control of those you entrusted their management with. It is, however, important that you set up the trust deed so that your trustees have a clear directive of how you would like the income and capital of the trust managed in your best interests.

Reducing your estate duty liability

Where the estate planner has growth assets, such as shares or property, which could increase their estate duty liability in the event of death, an inter vivos trust can be used effectively to reduce this tax. By transferring the asset, either through sale or donation, to a living trust, the estate planner effectively pegs the value of the asset in their estate and all subsequent growth in the asset will take place in the trust vehicle meaning that estate duty and executor’s fees will only be calculated on the value of the asset at the time it was transferred to the trust. Further, keeping in mind that a trust never dies, the assets will not form part of the beneficiaries’ respective deceased estates thereby avoiding estate duty once again.

Protecting your assets from creditors

If you have risky business interests and wish to protect your personal assets from possible bankruptcy or insolvency, you can set up a living trust into which your personal assets, such as your home and investments, are transferred provided that your estate remains in a solvent position after you have relinquished control of those assets to the trust. If your business goes insolvent, your creditors will not have a claim to the assets held in trust, subject to a number of exceptions. Very importantly, the trust founder in such circumstances must be seen to relinquish full control of the assets to the trust. If not, the courts may lead an investigation to determine whether the trust is being used for ‘sham’ purposes and, if found to be so, creditors may be able to attack those assets.

Securing a growth asset for future generations

A trust can be used effectively to house and preserve assets, such as a family farm or a holiday home, which the trust founder would like to pass from generation to generation. In such circumstances, the trust serves as a valuable succession planning tool by ensuring that multiple beneficiaries across successive generations can enjoy the asset without fear of it being alienated or sold.

In order to achieve this, the trust founder would need to set up an inter vivos trust and sell the property to the trust. The loan account would reflect in the trust’s accounts and form part of the trust founder’s deceased estate. As a growth asset, the value of the property held in trust is likely to continue to grow over time, although the value of the asset appears in the deceased’s estate at the selling price. As a result, all growth in the value of the asset will take place in the trust and will not attract estate duty in the trust founder’s deceased estate.

Through your trust deed, you can set out whether the trust is a vesting or discretionary one, and which beneficiaries may receive income from the trust and which may receive capital. In circumstances where there are multiple beneficiaries, setting up a trust solves the problem of having to divide up an asset between the various beneficiaries, and provides a vehicle through which the home or farm can be jointly owned by all the nominated beneficiaries.

Providing for a surviving spouse

Assets that form part of your deceased estate are subject to estate administration and the somewhat lengthy winding-up process. To provide financially for your surviving spouse and to avoid delays in them having access to money, a trust can be used to house assets intended for their benefit. Once again, the wording and mandate contained in the trust deed are of the utmost importance to ensure that your surviving spouse receives the benefits due to them.

The flexibility in setting up a trust allows you to determine how the income and capital of the trust will be managed. For instance, you nominate your surviving spouse as an income beneficiary of the trust, while appointing your children as capital beneficiaries. In doing so, your surviving spouse will be entitled to the income from the trust and, in the event of her passing, your children will be beneficiaries of the trust capital. This is generally a much simpler and more efficient way of providing for a surviving spouse and children than incorporating a personal servitude, such as a usufruct, into your will.

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Eric Jordaan

Crue Invest (Pty) Ltd

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