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The trust is dead – long live the trust!

Do the benefits of a trust still hold water?
If formed for the right reasons, trusts can offer benefits such as asset protection and continuity, writes the author. Picture: Shutterstock

Increasing focus on trusts by revenue authorities, both locally and offshore, has created the perception that trusts are being targeted – especially from a tax perspective – and that they are going to become obsolete. The question now is should trusts still be used in estate planning, or has their star faded?

Trusts still have an important role to play within estate planning if they are formed for the right reasons, offering benefits such as asset protection and continuity.

That said, it has become much more expensive to hold assets within a trust, and there are less tax planning opportunities now than during the 1970s, when trusts were not even subject to tax.

If your sole objective in forming a trust is to obtain a tax benefit, then you are likely to be disappointed at some point in the future.

Trusts still offer a number of other highly attractive benefits, and can be an extremely useful tool within estate planning. 

Ultimately, the trust concept has been around for a long time and is unlikely to die any time soon. There are many issues to take into account and it is recommended that one consults a fiduciary advisor before making the decision to form a new trust or to terminate an existing one. This is especially relevant if you or your heirs are planning on emigrating to another country, as tax residence and exchange control issues would become particularly important.

Key changes to the taxation of trusts

The main change in the taxation of trusts in recent years was the introduction of section 7C of the Income Tax Act, which came into effect from March 1, 2017. This section applies the official rate of interest to low-interest or interest-free loans made to trusts. This was presumably implemented in order to make it more expensive for individuals to transfer assets to trusts.

From a tax point of view, this legislation has made it more costly to fund a trust by means of a loan account. However, it should be noted that this is not the only way to fund a trust.

The only other major change implemented in recent times is the introduction of a stepped rate of estate duty and donations tax. From March 1, 2018, the value of estates and donations above R30 million are taxed at 25% rather than 20%.

The introduction of a stepped rate of estate duty perhaps strengthens the argument for the use of trusts in estate planning, particularly where multi-generational assets such as farms or holiday homes are involved.

Although a trust is taxed at a higher rate on, for example, income (45%) and capital gains (36%) than an individual, a trust is a legal person rather than a natural person or a human being, and accordingly it is not subject to estate duty or death taxes. If a holiday home or a farm is held in the name of the individual family members, the family would be liable to pay estate duty on that asset on the death of each individual owner as it passes from one generation to the next. This could become particularly onerous from a liquidity perspective if large amounts of estate duty are paid every generation.

Additionally, growing awareness of global issues such as situs tax further evidences the value of trusts in estate planning. Situs tax is the name for a death tax levied on assets located in countries such as the United Kingdom and United States, even when they are owned by non-residents of that country.

Although there are rules in place to prevent paying tax on the same assets twice (double tax), an issue may arise if the tax in the foreign country is levied at a higher rate than in South Africa. In the UK and the US the rates of death tax is up to 40%, whereas in South Africa it is a maximum of 25%. Individuals could therefore end up paying death tax on their assets at a higher rate.

Given the exchange control restrictions on holding direct offshore investments in local trusts, South Africans may consider the use of offshore trusts to achieve the same estate planning objectives.

Additional key benefits of trusts:

There are a number of other key benefits to using trusts in estate planning, including:

1. Access to funds

While a deceased breadwinner’s estate is being wound up, it may be difficult for his or her dependants to obtain the required maintenance from the estate – which is a growing concern given the increasingly prolonged process around finalising deceased estates.

However, if the breadwinner founded a trust during his or her lifetime, the dependants would have access to a separate source of maintenance that is not affected by the process of winding up the deceased estate.

Of course, an alternative source of income may be a life insurance policy payable directly to the beneficiaries, but this can present its own issues such as possibly increasing the estate duty payable (depending on who is the beneficiary), being expensive and potentially proving difficult to obtain if the life insured has pre-existing health issues.

2. Avoiding curatorship issues

A trust can help individuals who are incapacitated through a disease or disability such as Alzheimer’s or senile dementia. If you have formed a trust during your lifetime (an inter vivos trust), and the bulk of your assets have been placed into trust, then your family’s financial well-being will be assured even if you are no longer able to manage your own financial affairs. 

3. Continuity

Entrepreneurs and businesspeople oftentimes do not have the time or skill to dedicate to the proper management of their personal affairs, which are consequently neglected. By forming a trust and appointing skilled trustees to actively administer assets and provide objective advice and governance, your personal affairs can be managed with minimal attention from you during your lifetime and minimal disruption after your death. This also reduces the difficulties frequently suffered by heirs who suddenly have to make decisions on matters of which they have little or no knowledge.

4. Protection

Trusts provide a fortification for the protection of assets against attack, for example by business or personal creditors, disgruntled spouses, delinquent heirs and so on. Save for any assets vested in or a loan owing to an individual, trust assets cannot be attached to satisfy a person’s or beneficiary’s debts. This is because they are not owned by the individual or the beneficiary, but rather by the trustees in their capacity as such. In the case of a discretionary trust, a beneficiary’s creditors cannot even attach any potential income owing to the beneficiary from the trust.

5. Special needs family members

You may wish to form a special trust for the sole benefit of a family member who has special needs, or a mental or physical disability which renders them incapable of earning enough money for their care or managing their own financial matters. The requirements for the registration of a special trust with Sars are stringent and must be supported by evidence such as doctors’ reports confirming the beneficiary’s physical or mental challenges, but the benefit of a special trust is that it is taxed at the individual marginal rate of tax, rather than at the flat trust rate of 45% on income and effective 36% on capital gains.

Individuals who do not qualify for a special trust, but who are practically unable to manage their finances owing to alcohol or drug dependency, old age and so on, may also benefit from the structure, mentorship and oversight provided by a well-governed trust despite not receiving the same tax benefit as a special trust.

6. Wealth preservation

The Davis Tax Committee was of the view that the intergenerational transfer of wealth dampened commercial activity and entrepreneurial spirit by creating “trustafarians”. On the contrary, a well-run trust allows succeeding generations to participate in and benefit from the wealth created in one generation by allowing wealth to be managed and distributed to beneficiaries across generations.

By creating a trust, a preceding generation can improve their descendants’ lifestyles without creating a dependency on inherited wealth, thus avoiding a situation where talent is wasted because there is no financial need to develop it, or where one generation’s wealth becomes a disincentive for the next generation. In practice, trusts generally tend to exist for no more than two or three generations before vesting occurs.

Hilary Dudley is the managing director at Citadel Fiduciary Proprietary Limited.

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The number one question which every parent of minor children should ask himself/herself is: “what happens to my children in the event that one or both parents die before my children can provide for themselves?” With a well-established trust and a decent third party trustee, there is at least the assurance that the proceeds from a life insurance policy or other nest eggs will be well applied for the benefit of the minor children. Frankly, I don’t see any other way to protect minor children. So until such time as a better solution is found to this problem, the Davis committee et al must leave trusts alone. They exist for a reason.

A democracy enables and motivates politicians to think short-term only. Politics come down to bribing some voters with the money taken from other voters. The preservation of assets is the ultimate challenge for the owner of capital. Modern democracies are running on the exropriated assets of saveral

People in democratic countries have developed innovative ways of stealing from themselves. An offshore trust does offer a safe haven……..for now….

@jnrb: Agree 100%, people never think about the children should their parent(s) come to pass. I have come to find that most people have this idea in their head that a trust is used for money laundering or tax evasion.

@Sensei: “People in democratic countries have developed innovative ways of stealing from themselves.” Could not agree more, not to mention what it looks like in a socialist country…

“An offshore trust does offer a safe haven……..for now….” Too true and if that is done away with another vehicle will take it’s place.

A Trust is not a legal entity but a contract between the founder and the trustees on how the trustees should manage the assets of the trust for the benefit of the beneficiaries. In legal terms, a trust is a stipulatio alteri contract; a.k.a., a contract for the benefit of third parties.

Whilst a Trust does attract a higher tax rate, it should never pay tax due to the conduit principle. And everyone can be a tax payer, even minor children can be registered as taxpayers and therefore the effective tax paid on the full income is very little.

Every SA tax payer can currently donate R100k pa tax free and this is how wipe out loan accounts and hence obviate the interest on loan accounts after transferring assets into a trust.

It is by no means expensive to register a trust if you consider that death taxes and fees can reach as high as 55% in SA. That means that, if assets are held in your own name, by your 3rd generation, every cent of wealth you created in your lifetime is gone…every cent. Your grandchildren will thus have no financial benefit whatsoever from your entire time on Earth!

This is why trusts are not just necessary, but imperative, for future generations to benefit from and build on your economic efforts.

Income can only for a certain time “be reduced”, when income increases above a certain levels, taxes become a normal. That said continued growth in assets resolves some of these issues. Creative long term thinking and planning is needed within the tax laws, but a trust is an excellent long term vehicle for wealth protection for now.

The most obvious trust abuse that SARS should target is tax-free use of trust assets.

If the trust distributed R1m for Johnny to buy a car and rent an apartment, Johnny would have paid tax. Instead Johnny lives in a trust apartment and drives a trust car. There are hundreds of billions in trust assets being used this way.

We have fringe benefit regulations. It should be dead simple to calculate the fringe benefit and tax it

Please help me out:

How would Johnny pay tax on money he received from a trust if it was spent on a car and an apartment?

How do you get to hundreds of billions? Presumably in South Africa?

Finally just how many Johnnys do you estimate are out there in South Africa doing what you think they are doing?


No I don’t agree. The trust needs to generate income in order to buy Johnny’s car e.g. from investments. That income is either taxed in the hands of the trust at 45% or if distributed to the beneficiaries, it will be taxed in their hands. With regards to the house, the owner paid capital gains tax on the house when it was sold to the trust or if it was donated to the trust, he would have paid donations tax on the amount above R100,000. To suggest that the trust should charge rental to the beneficiaries is preposterous because then the house of every individual should charge the owner rental for staying in the house. The playing fields need to be level.


Most of the really big asset pools in trusts are decades old, you are thinking short term and current. A trust is a legal entity that owns an asset being used by a beneficiary. It would not let strangers live in the house for free, letting Johnny stay there is a form of distribution that would be taxable if it were cash.

@Johan_Buys Sorry, but you clearly don’t know how a trust works if that is your argument / statement.

I agree with @jnrb, as the trust would have needed to get funds from some form of income which would have been taxed and once the funds are invested in equity or property, CGT is payable if those assets are sold and dividend withholding tax is also applicable, so taxes are definitely paid don’t you worry, they are clearly in the sights of SARS.


Read slowly what I said : if grandpapa’s trust owns shares in his old business, some equities, a syndicate share in a game reserve, the plett holiday house, the private plane, a bunch of houses and apartments:

There SHOULD be a fringe benefit tax on the use of the house in plett, the lodge in the lowveld and living in the apartments and houses owned by the trust and the intrest-free loans from the trust, etc etc

There is a very good reason why the tax authorities are silent on this matter.

If your recommendation is implemented, Johnny will simply pay rental for the assets used which can be offset against his loan account and ultimately create a situation where Johnny owes the trust which will reduce his personal estate when he passes, reducing his estate duty.

Furthermore, the trust is now income producing and can apply expense deductions incurred by those assets. Depreciation, fuel, maintenance, bond interest, bond admin fees to name a few.

Now Johnny can keep raising new bonds on the property (which is tax-free capital for the trust) enabling the trust to acquire more assets, more income and more deductions.

In the end the trust will generate a significant accumulated loss that will reduce tax revenue & nullify CGT when the time comes to sell the property.

We can drill this down even further e.g. Johnny uses the vehicle for business and runs his business from the trust property, but the point is made.

Tax authorities know that if they implement what you say, tax revenue will decrease negating their objective of maximising the tax burden to the point where tax paying citizens only just survive.


So you are choosing to ignore all the taxes that would have been paid just to get the funds or assets into the trust in the first place. Now you want to go back in time and propose a tax on trust assets that a grandfather purchased many decades ago?

The less I say about this daft proposal the better. Sounds like something I come to expect from the Davis Tax Committee with their proposed “hate” taxes on the wealthy. If there’s not increased Estate Duty Tax there are calls for taxing Trusts more and (at least in my opinion) “fine” people that paid their taxes, chose to save and invest in assets and then chose to use a legal structure such as a trust, to make sure their is a form of safety net for their children should anything happen to them (the parents).
Now you want to go back in time and make people pay taxes which were not in place when the trust was formed?

But like the Davis Tax Committee keep asking for taxes to be implemented such as these that “fine” people for choosing to save and protect their assets they have accumulated throughout their lives and possibly generations, I mean why don’t you just ask to have them expropriated without compensation, oh wait the ANC is already going there.

These socialist tax practises will just keep chasing people with money away because their property is being taxed additionally after the fact and then the right to private property is being threatened as well while the economy is coming down like a house on fire.

What better way to disincentivize people to save money and to try to protect their assets against a corrupt state.

But let’s keep going backwards and get the ANC to enforce exchange controls like the government did in the 80’s.

I’ll be watching as the nation goes bankrupt with these type of policies.

Like Hemingway said:

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

End of comments.





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