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Using an inter vivos trust to achieve your objectives

An inter vivos trust can be used to limit estate duty liability, bolster succession planning, or to protect certain assets from creditors.

An inter vivos trust is a trust that is set up during the founder’s lifetime to achieve specific estate planning and asset protection purposes. Once formed, the trust can be used to house certain assets or investments for the benefit of the trust’s beneficiaries. The trust assets are managed and administered by the appointed trustees of the trust as per the trust deed. An inter vivos trust can be effectively used to protect assets intended for the founder’s beneficiaries, limit estate duty liability, bolster succession planning, or to protect certain assets from creditors. However, not everyone requires an inter vivos trust and it is important to understand the context in which such an entity can be of use to a person.

Definition of an inter vivos trust

An inter vivos trust is governed by a trust deed and allows certain assets to be managed by the appointed trustees on behalf of the trust beneficiaries. This structure allows for assets to pass through successive generations without falling into the individual estates of family members who have passed away. Typically, the trust founder will enter into a contract with the trustees in the form of a trust deed in terms of which he will make an initial donation in order to set up the trust. In general, the founder will use the trust entity to provide income for certain beneficiaries, or to provide funds for living costs, ongoing care, maintenance, education or medical needs, or to transfer assets to the capital beneficiaries on the termination of the trust.

As such, inter vivos trusts can either be set up as vesting or discretionary trusts. A vesting trust means that the named beneficiaries have a right to receive certain benefits, while the benefits that flow from the assets are managed by the trustees. On the other hand, the more commonly used discretionary trust allows the appointed trustees to use their discretion in determining how the benefits of the trust are distributed to the beneficiaries.

The parties to the trust

There are essentially three parties involved in setting up an inter vivos trust. The founder, also known as the settlor or donor, is the person who initiates the trust and who donates the property for another’s benefit. The trustees are the custodians of the assets held in the trust, although they do not necessarily have an interest in the assets. In order to ensure independence and objectivity, it is advisable to appoint an odd number of trustees, with the optimal number being three, one of whom is an independent trustee. The independent trustee should ideally be an unbiased, unrelated third party who has experience in the management of trust assets. It is the job of the trustees to ensure that the trust assets are managed in accordance with the trust deed and applicable legislation. The beneficiaries of the trust are those individuals or entities who benefit from the trust’s assets or income.

The benefits of a trust

The protection of assets from creditors: The ownership of an asset by a trust can protect a family’s assets from potential creditors. Further, such an asset will not fall into the personal estate of the beneficiary and will therefore also be protected from the beneficiary’s creditors. Assets that are held in trust may also be protected from claims arising from matrimonial disputes, although it is important that these trusts are correctly set up and managed to as to avoid being viewed as ‘alter ego’ or ‘scam’ trusts by the court.

Succession planning and continuity: One of the main advantages of a trust is that it survives the life of an individual and can, therefore, span multiple generations, ensuring continuity and allowing for seamless succession. On the death of the trust founder, the assets held in trust will not form part of the winding-up process, and this can provide the beneficiaries with ongoing access to funds after the founder’s death.

Flexibility and discretion: A discretionary inter vivos trust gives the trustees a mandate to manage the trust assets in the best interest of the beneficiaries and is, therefore, an extremely flexible and effective vehicle for protecting and managing assets. Using their discretion, the trustees can make decisions as and when circumstances, legislation and fortunes change.

Tax planning: If correctly set up, an inter vivos trust can be administered to mitigate estate duty, income tax, CGT, donations tax and transfer duty. Upon the founder’s death, the assets held in trust will not be liable for estate duty, executor’s fees or CGT.

Centralised management of assets: Depending on the circumstances of the founder, a trust can be used to centralise and control assets on behalf of beneficiaries who are unable to do so themselves, such as in the case of a mentally or physically handicapped child. A trust is also an excellent vehicle for housing indivisible assets such as a family holiday home or farm on behalf of multiple beneficiaries. Where an inter vivos trust can be used to provide for a beneficiary who is physically or mentally disabled, it can qualify as a special trust with certain tax benefits.

The types of assets that can be held in trust

The founder can transfer assets to an inter vivos trust by either selling the asset to the trust via a loan account or donating the assets to the trust using the R100 000 per year tax-free exemption. Assets that can be held in trust include land or immovable property, investments, cash, collectables or jewellery, all of which are generally referred to as the trust capital.

Tax implications

Our law recognises an inter vivos trust as a taxpayer and, as such, living trusts are liable for both income tax and capital gains tax. In respect of income tax, trusts are taxed at a flat rate of 45%, whereas special trusts are taxed at a sliding scale from 18% to 45% (as per individuals). With the exception of special trusts Type A, inter vivos trusts have a CGT inclusion rate of 80% with an effective rate of 36% of the gain to be added to the taxable income of the trust. Special trusts Type A are taxed at individual rates, with the CGT exclusion on primary residences allowed if the criteria are met.

Disadvantages of an inter vivos trust

The setting up and ongoing management of a trust is administratively intensive as it involves the preparation of annual financial statements, the filing of income tax returns, ongoing record-keeping, the preparation of minutes and trust resolutions, running a separate bank account for trust cash flows and the maintenance of an asset register. There are naturally costs involved in this regard, especially if the trust is paying for the professional services of an independent trustee. Further, the founder of the trust must give careful thought to the reality that transferring assets to a trust will require him to relinquish control of those assets.

In order for a trust to be regarded as valid, the founder must set up the trust with the clear intention of handing control of the assets to the trustees. If on inspection the court determines that there is not adequate loss of control, the trust may be deemed invalid and the assets may no longer enjoy protection from creditors, and potentially have estate duty implications.

Generally speaking, inter vivos trusts can be beneficial to those whose estates exceed R3.5 million in value and who have capital appreciating assets that they wish to protect for future beneficiaries. However, not everyone will benefit from a living trust and it is advisable to seek the advice of a trusted expert before deciding whether or not to form a trust.

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Eric Jordaan

Crue Invest (Pty) Ltd

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