Find out more about the different types of trusts that can be set up and whether it is always the best option to house your assets.
Over the years the topic of trusts may have come up in conversation. Perhaps a friend or a relative established a trust for their children or someone spoke favourably about a trust in passing. But what exactly is a trust and is it right for you?
By definition, a trust is a legal entity in which a person known as a trustee holds or administers moveable or immovable property separately from his or her own, for the benefit of another person or persons (known as the beneficiaries) or for the furtherance of another purpose such as a charity. A trust is created by a person(s) known as the founder.
In South Africa, there are three primary types of trusts:
- An ownership trust: The founder of the trust transfers ownership of assets or property to a trustee(s) to be held for the benefit of defined beneficiaries of the trust
- A bewind trust: The founder transfers ownership of assets or property to beneficiaries of the trust but control over the property is given to the trustee(s)
- A curatorship trust: As per this structure the trustee(s) administers the trust assets for the benefit of a beneficiary who doesn’t have the capacity to do so (for example a person with a disability)
In South Africa, trusts are typically formed in two ways: ‘Inter-vivos’ (while the founder is alive) and ‘mortis causa’ or testamentary which is set up in terms of the will of a person and comes into effect after their death.
Living trusts are ideal for keeping ‘growth’ assets such as shares and property separate from your estate. Testamentary trusts are well suited to protecting the interests of minors and other dependents who are unable to attend to their own affairs.
Trusts are further distinguished according to their nature or object, for example business trusts, family trusts, vesting trusts etc. Your own unique set of circumstances will dictate what trust will suit you best.
Generally speaking, newly established trusts do not usually have funds which can be used to acquire assets. Trusts are normally funded by way of a loan, provided in most instances by the founder. Trusts can also be funded when assets are sold at market value to the trust and the purchase price of the asset remains as a loan owing by the trust to the lender.
There are various advantages to be derived from setting up a trust. Trusts are particularly useful from a property perspective in that a trust does not die. I.e. a trust is not liable for estate duty, transfer duty, executor’s or conveyancer’s fees that would be payable under the banner of an estate or in the hands of heirs. What’s more is that the trust does not pay capital gains tax as long as an asset is not sold.
Additionally, trusts can be used to ‘lock in’ value and protect assets. For instance, if you have a property registered in a trust, the property no longer forms part of your personal estate and is therefore protected from creditors even if you are declared insolvent.
That said, trusts aren’t for everyone and there are issues which can manifest. For instance, problems can crop up when trusts aren’t properly established or managed. The founder also effectively has to give up control of their assets and the intended beneficiaries might not receive an income until after an estate is wound up which can take time.
Of course there are various other issues relating to trusts. There are also costs involved in setting up and administering a trust. As is the case with anything of this nature, it’s best to speak to the experts, be honest about your circumstances and familiarise yourself with the intricacies before proceeding with a vehicle of this nature.