Seven best uses of trusts in estate planning
A trust is created when you transfer ownership of your assets to a trust, with instructions for the trustees to administer those assets for the benefit of a beneficiary. While trust strategies can be complex, the concept of a trust is relatively straightforward and can be used to accomplish a number of estate planning goals.
There are two main types of trust:
- Testamentary trust / mortis causa trust
A testamentary trust is created in your will and takes effect upon your death. This kind of trust will usually only be used when a beneficiary of your estate is a minor because minors cannot benefit directly from a deceased estate. The assets relating to a testamentary trust form part of your estate, so they are subject to any estate fees or taxes that apply. The trust can be changed at any time before your death by simply having a new will prepared.
- Inter vivos trust
With discretionary inter vivos trusts, the trustees are in full control of the trust. When you establish a trust between living people, property and asset ownership is passed immediately to the trust, which is administered by trustees on behalf of the beneficiaries. You can add more assets to the trust over time. Because the transfer of ownership is during your lifetime, the trust assets do not form part of your estate and are not subject to probate.
Seven main uses for trusts:
Whether it’s best to establish a trust during your lifetime or upon your death will depend on the intended use and your personal situation.
- You have children from a previous marriage
If you remarry and wish to protect your new spouse as well as children from a previous marriage, a trust can provide the answer that you are looking for by supporting your spouse during their lifetime, while ensuring that your children from a previous marriage eventually benefit from / inherit any remaining assets.
- Your spouse and/or children lack financial expertise
If your spouse and/or children need help with money management after you die, a trust allows qualified trustees to manage the trust assets on behalf of your beneficiaries.
- Your spouse or child is disabled
If you have a disabled spouse or child requiring care, a trust can be used to ensure that they receive an appropriate level of care after you die.
- You want minors to inherit
If you want minors to inherit, you can use a trust, which can provide income to the minor beneficiaries in their younger years. The trust also provides you with the opportunity to appoint trustees of your choice to administer the trust for the minors’ benefit. Without this trust setup, any inheritance they receive will go to the Guardians Fund (which is administered on their behalf by people that you do not know) as minors can’t inherit in their personal names in South Africa. Therefore a trust is a crucial inheritance tool for anyone with minor children as beneficiaries.
- Tax planning
Income earned in an inter vivos trust is taxed at the highest marginal tax rate (currently a flat rate of 45%), but any trust income that is distributed to beneficiaries will be taxed when the funds are in their hands. So, if your beneficiaries are in a lower tax bracket the investment income can be taxed at their personal lower rate.
2018 tax year (1 March 2017 – 28 February 2018)
|Taxable income (R)||Rates of tax (R)|
|0 – 189 880||18% of taxable income|
|189 881 – 296 540||34 178 + 26% of taxable income above 189 880|
|296 541 – 410 460||61 910 + 31% of taxable income above 296 540|
|410 461 – 555 600||97 225 + 36% of taxable income above 410 460|
|555 601 – 708 310||149 475 + 39% of taxable income above 555 600|
|708 311 – 1 500 000||209 032 + 41% of taxable income above 708 310|
|1 500 001 and above||533 625 + 45% of taxable income above 1 500 000|
- Avoid the problem of having your assets frozen
Upon the death of a person your family’s assets will be frozen. This means that none of these assets can be withdrawn, transferred, or sold. If your family requires money to cover living costs, they will have to petition the court for a living allowance. That allowance can be denied by the court, leaving your family without access to your assets for a period of time after you die. This can be avoided if the assets are owned by a trust. The trust continues to exist even though a member of that trust, be it the founder, a trustee or beneficiary has passed away. This means that the beneficiaries, through the trustees, will still have full access to the assets within the trust.
- You want to bypass probate
Probate is the public court process that verifies the accuracy of wills and distributes people’s assets. The proceedings become public record, which means information about how much money and property your family owns is public record.
With an inter vivos trust you bypass probate for any assets held in the trust, with the added peace of mind that assets are transferred and distributed as you intended. This also offers greater privacy for trust assets, as probate is a public process and anyone can access these records. The greatest benefit however must be that the assets in the inter vivos trust do not form part of your estate and therefore no estate duty or executors fees are payable n them.
You are welcome to contact Trustfocus to arrange a free consultation with one of our skilled consultants to discuss using a trust for estate planning:
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)