Truths About Trusts

Did you know that a trust is not simply: a trust?

There are many different classifications of trusts in South Africa, such as ownership trusts, bewind trusts and curatorship trusts.

Trusts can either be created during a person’s lifetime, which is known as an inter vivos trust, or set up according to a person’s will after they die, which is known as a mortis causa trust.

Different trusts give beneficiaries different rights, depending on how much a trustee wishes to distribute of an income, assets or capital to beneficiaries. And trusts can be used for a variety of purposes, from asset protection to charity. There are also ‘special trusts’, which can be set up for the benefit of a person with a disability, or relatives who are under 18 years old.

Although trusts have been around for centuries, there are many misconceptions that surround them and they have become far less popular in the last couple of decades. The SA Revenue Service (SARS) is arguably partly to blame for the bad reputation that trusts now have, and their continual criticism has resulted in many owners deregistering their trusts and transferring out their assets.

Given that there is a quagmire of misinformation out there, it is important to educate yourself if you have a trust or are thinking of creating one. Here are 5 truths about trusts that may debunk some myths and help you on your way:

1. Trusts aren’t only for the wealthy

Although many people believe that trusts are only for the rich, the best time to set up a trust is actually when you are making preparations to build wealth, before you have accumulated a significant fortune. Registering a trust after you’ve generated wealth could end up being expensive — due to various costs, such as capital gains tax and transfer fees that you will need to pay when you move your assets into trust.

2. Trusts can help with tax planning

A unique feature of trusts is that they allow you to shift tax burdens from the trusts to beneficiaries through the ‘conduit principle’, which, according to the South African Institute of Chartered Accountants (SAICA), means that “if income accrues to a trust and the trustees award it to one or more beneficiaries in the same year, the income retains its nature in the hands of the beneficiary.” This basically results in less taxes needing to be paid.

Even though the sole point of a trust isn’t to save on taxes, you do stand to save on capital gains tax, estate duty, executor’s fees and income tax if you set up a trust and manage it properly. Consequently, SARS is not a fan of trusts, particularly because trusts enable the postponement — and potentially the avoidance — of estate duty in the event of death.

All trusts need to be registered with SARS and the trustee is usually the representative taxpayer of a trust. However, the income of a trust can be taxed in the hands of the donor, beneficiary, or the trust itself.

3. You can still control your assets in a trust

Contrary to popular belief, a trust can be structured in such a way that allows you to maintain a sense of control over your assets. You can legally be both a trustee and the founder, and you can even be a beneficiary, while maintaining the legitimacy of the trust.

4. You can do your own admin

When it comes to setting up a trust, be sure to choose your service provider wisely, as some charge exorbitant fees. If possible, it can be worth doing as much of the administration as possible yourself, so as to reduce costs and ensure that your financial plan is executed as per your intentions.

5. It’s important to read your trust deeds

If you do decide to include a trust in your estate planning, be sure to always take the time to read your trust deeds and to adapt your trusts to any changing circumstances. Many trustees have little knowledge of what is expected of them as managers of a trust. And no trustee can ever claim ignorance if they don’t strictly adhere to the management of a trust deed.

However, a trust will only be investigated by SARS if it is obviously being misused or mismanaged. If it is correctly structured and administered in accordance with common law, the trust deed, and the Trust Property Control Act, a trust is a perfectly legitimate investment vehicle for South African tax residents.

(Information gathered from SARS and IOL)