Very often when people seek estate planning advice, they may be advised to consider a trust, but they are mostly advised to avoid the hassle of establishing a trust while they are alive (a living, or inter vivos, trust) and instead have a trust registered upon their death and created in their will (a testamentary trust).
The effect of the two types of trust is vastly different, and you need to understand this difference before making a decision. Have a look at some pointers below:
- A trust may be used to hold and protect personal or business assets. This is particularly beneficial in the event of subsequent liquidation, sequestration or divorce.
- Trusts may also be used to hold shares in businesses to ensure continuity in the ownership of assets.
- a Special trust for a mentally disabled or incapacitated person allows for the safe custody of assets, and has the benefit of lenient income tax and capital gains tax (CGT) treatment.
- Trusts can also be used to avoid the need to place a person under curatorship, if proper planning was done BEFORE the person become afflicted. This is particularly true for people who suffer from Alzheimer’s disease or senile dementia. If you have created a trust during your lifetime whilst you were of sound mind and capable of attending to your own financial affairs, these would continue as before with persons whom you entrusted as the trustees of the trust. It is however important, as with all Inter Vivos trusts, that the deed makes provision for replacement trustees amongst other things.
- On the other hand, you may be a single parent and/or a salaried employee, who is worried about who will look after your children’s financial affairs when you are no longer around.
- Trusts also have an important role to play in estate planning and will affect your decision in terms of how much risk and life assurance you require. This is because setting up a trust will affect how much estate duty and CGT your estate will pay and the provision you make for your dependants after your death.
Inter vivos trusts
An inter vivos trust is established during your lifetime in order to manage certain assets or investments, and support beneficiaries, such as family members, during your lifetime and after your death and to protect assets
It is also used to transfer assets to the capital beneficiaries (in other words, the beneficiaries who may receive trust assets and profit on the sale of trust assets) during the lifetime and on the termination of the trust.
Inter vivos trusts are ideal for keeping growth assets (shares, properties and alternative investments) out of your estate and are a superb mechanism for limiting estate duty and protecting assets from generation to generation.
These trusts can be structured as either vested or discretionary inter vivos trusts.
In a discretionary trust, the trustees have the right to decide how much income (or capital) to award to each beneficiary, whereas in a vested trust the beneficiaries are the rightful owners of the assets and therefore have a right to them, but the administration is taken care of by trustees until, for example, a child turns 25. On the death of the beneficiary, these assets will be included in his or her estate. The beneficiaries will be liable for all taxes resulting from the assets.
A discretionary trust is extremely flexible and can be used to take into account any family, financial and legislative circumstances. This means that the trustees can manage the trust’s assets in the best interests of the beneficiaries by taking into account all the relevant factors at that time. This flexibility caters for uncertainties such as divorce, insolvency, an increase in family size, a change in the family’s fortunes, and changes to tax legislation, provided the beneficiaries are defined and the trust deed is drafted in such a way to anticipate these uncertainties. Proper planning is however needed to ensure tax liability is covered.
With regards to costs, the creation of the Inter Vivos Trust is usually costly and is payable upon creation of the Trust.
Testamentary trusts come into existence after the death of the founder. They are commonly known as “will trusts” and, as such, are created in terms of the will of a deceased person. The implication is that during your life your assets will not be protected, and on your death taxes will be paid first on the value of the estate, before it is transferred into the trust.
Testamentary trusts are particularly suited and in fact essential to the protection of the interests of minors (because minor children cannot, in terms of South African law, inherit anything) and other dependants who are unable to take care of their own affairs on the death of the person supporting them. In the case of minor children, you as a parent do your children a disservice if you do not have a Will that makes provision for a Will trust until they are majors.
In the absence of a trust (testamentary or inter vivos), assets from a deceased estate left to minor children are sold, typically placed in the Guardian’s Fund and the money is paid to them when they reach adulthood, alternatively, whoever they stay with as guardian, have to incur the expenses fist and then claim form the Guardians fund whilst they are still minors. This is clearly not a wise choice.
I always advise my clients that the child’s guardian does not necessarily have to be a trustee; in fact, it is often a good check and balance to have a separate, independent person who is financially astute as a trustee.
Testamentary trusts are created at the winding up of a deceased estate, following a specific stipulation in a person’s will that a trust be set up. Such a stipulation serves the same purpose as a trust deed. The costs of creation is therefore cheaper as it is part of the same fee you pay to have your Will drafted.
Generally, the terms of a will trust cannot be amended, but the Trust Property Control Act does give the court certain powers to amend this type of trust instrument. This makes a testamentary trust relatively inflexible.
Clearly, you need to establish your financial and personal goals and understand your personal financial risk before you decide which type of trust will best suit your needs.
Each type of trust will have vastly different implications, which you need to understand. Once decided, it is furthermore important to get the correct legal and financial advice about the drafting of the documents
Should you need any advice on trusts or estate planning, please do not hesitate to contact ALCOCK & ASSOCIATES INC , we will be happy to assist.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).
Adjusted from Copyright © 2018 FISA website and information