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What to consider before registering an inter vivos trust

This area of planning should ideally be undertaken with guidance and advice from a fiduciary expert.

Trusts can take many forms and serve a range of purposes in your overall portfolio, and this area of planning should ideally be undertaken with guidance and advice from a fiduciary expert. If you’ve taken the decision to set up an inter vivos trust, which is a trust formed during your lifetime, there are a number of factors to be considered before registering your trust.

What is your intention for setting up a trust?

Before registering your trust, you should be very clear on your intentions for setting one up. A living trust can be used for a number of purposes, such as moving growth assets out of your estate so as to reduce estate duty and other taxes, protecting assets intended for future generations, or reducing tax liabilities in one’s estate. A living trust is an excellent estate planning tool to ensure the smooth transfer of assets from one generation to another without that asset being impacted by CGT, estate duty, insolvency, family misfortunes, divorce, or acrimonious family relations. If set up correctly, a living trust can be used to effectively mitigate taxes such as estate duty, income tax, CGT, donations tax, transfer duty, and executor’s fees, and to protect assets from potential creditors, especially where the trust founder is involved in high-risk business ventures. A trust can also be formed to provide a mechanism for the management of assets intended for beneficiaries who are unable to manage their own affairs, such as in the case of a mentally disabled person or a drug addict.

What type of trust do you intend to form?

The type of trust that you register will to a large extent depend on what you want your trust to achieve. For instance, if your intention is to create a trust to house assets for the benefit of family members and their future generations, then your trust would be considered a ‘family trust’. In such a case, it is likely that the trust founder, trustees and beneficiaries are all family members, and you would need to ensure that you appoint an independent trustee to create impartiality. In the case of a bewind trust, the assets or property in the trust would be owned by your beneficiaries, but control of the assets would be given to the trustees. On the other hand, an ownership trust would entail the transfer of ownership of the assets or property to the trustees who will then administer them for the benefit of your beneficiaries. Before registering your trust, it is also important to understand whether you intend for the trust to be a vested or discretionary trust. In a vested trust, the benefits to the beneficiaries are set out in the trust deed, whereas in the case of a discretionary trust, the trust deed provides trustees with discretion as to how the income and capital should be distributed amongst the beneficiaries and vesting only takes place at their discretion.

Are you willing to relinquish control of your assets?

As the trust founder, it is important that you are willing to relinquish control of the assets to the trustees. Transferring of the assets can be done by selling the assets to the trust by way of a loan or donating assets to the trust – keeping in mind that you can donate up to R100 000 per year on a tax-free basis. If you fail to fully relinquish control of the assets, you stand the risk of the trust being labelled an alter-ego or sham trust, and the assets will be deemed to belong to you personally which can have far-reaching financial consequences. Remember, once the trust is registered, the assets fall under the control of your trustees and it must be clearly demonstrated as such. Alter-ego trusts are often used in acrimonious divorces to hide personal assets from the other spouse and, in such instances, the courts can order the ‘piercing of the veil’ of the trust and, if found to be an alter-ego trust, the consequences can be dire. As an aside, if you are dependent on an asset to help fund for your retirement, think carefully before transferring it to a trust as it will no longer be yours to control which, in turn, can impact your ability to retire comfortably.

How does a trust fit into your overall estate plan?

Once again, before registering your trust, think carefully about the role it plays in your overall estate plan. Trusts can provide flexible succession arrangements because they can outlive you and ensure continuity of ownership without disruption. If housed in a trust, assets intended for your loved ones will remain accessible in the event of your death as they do not run the risk of being frozen and are not subject to estate administration. Trusts can also be used effectively for estate-pegging to ensure that any growth on an asset takes place in the trust rather than in your personal estate which, in turn, can reduce your personal tax liability.

How will the trust be taxed?

The manner in which your trust will be taxed will depend on a number of factors such as the type of trust you intend to register, whether the trust is a special trust Type A or B, how the trust deed is drafted, and how the trust is classified. The income of a trust may, depending on the circumstances, be taxed in the hands of the trust founder, beneficiary or trust. All trusts, with the exception of special trusts Type A are taxed at a flat rate of 45%, whereas Type A trusts are taxed on a sliding scale from 18% to 45% (the same as a natural person). No estate duty is payable by trusts. Where the trust employs people, it may be liable for PAYE, Skills Development Levy and UIF.

Who will you appoint as trustees?

Given the fact that you will be relinquishing control of your assets, you need to ensure that your trustees have the requisite skill and expertise to manage the trust assets. Remember, if you are setting up a family trust, you will need to ensure that at least one trustee is independent and in no way related or connected to members of your family. An independent trustee gives creditors comfort that the trust is being managed impartially and that it is safe to do business with the trust. As the trust founder, it is not possible to be the only trustee and the only beneficiary because you cannot enter into a contract with yourself. In such circumstances, you would also need to appoint an independent trustee. It is also wise to give consideration to the number of trustees you intend to appoint, with three being the optimal number. Too many trustees can slow down the decision-making process, make it difficult to convene meetings, and give rise to other logistical problems when it comes to obtaining signatures and attending to the affairs of the trust in person.

What are the costs involved?

Before registering your trust, make sure that the financial benefits of having a trust outweigh the costs of having the trust administered. Keep in mind that there are accounting, legal, banking, fiduciary, and secretarial costs involved in managing the affairs of the trust, and it is important to know upfront what costs you can expect to pay. It is also difficult to find experienced fiduciary experts, so be sure to find out what you can pay for this type of expertise.

Who will be the beneficiaries of your trust?

Be clear on who you intend to benefit from the trust and how you would like them to benefit, keeping in mind that your beneficiaries can be individuals or organisations. Your beneficiaries can qualify to receive income and/or capital from the trust and can have either vested or discretionary rights. Beneficiaries with vested rights are entitled to pre-determined benefits in terms of the trust deed, whereas beneficiaries with discretionary rights can be considered potential beneficiaries who are only entitled to receive a benefit if the trustees decide as such. An income beneficiary is eligible to receive income from the trust as determined by the trustees, whereas a capital beneficiary can receive a capital distribution from the trust at the trustees’ discretion – keeping in mind that a beneficiary can be both a capital and income beneficiary.

When will the trust terminate?

Give thought as to when and how your trust will be terminated. For instance, you may wish your trust to come to an end after the expiration of a period of time, on the death of the last beneficiary, or once the youngest beneficiary reaches a certain age. You can also leave the closure of the trust to the determination of your trustees – an arrangement that can protect your beneficiaries against future uncertain events.

Remember, your trust deed is the founding document of your trust, and its importance cannot be overstated. Our advice is to seek professional advice when drafting and registering your trust to ensure that it meets all the legal requirements and that it is appropriately designed to meet your longer-term estate planning objectives.

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Craig Torr

Crue Invest (Pty) Ltd

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