Would you benefit from having a trust?

TRACY MULLER looks at the circumstances under which it may be favourable to transfer some of your assets into a trust.

TRUSTS are tools to protect and grow wealth for your beneficiaries during and after your lifetime.

A trust is an important financial and estate-planning tool that, together with your will and other structures, can help protect your personal and business assets for your beneficiaries. It is critical to get expert advice so that you can choose the right trust for your needs, as different trusts have different purposes, benefits and limitations.

Generally, trusts provide flexibility and continuity, facilitate effective distribution of your assets when you die, enable the protection of dependants and vulnerable beneficiaries, and can protect assets from being seized. You can also set up a trust for charitable purposes.

WHAT IS A TRUST?

A trust is an arrangement into which the ownership of one’s assets is transferred to be administered for the benefit of others. There are three key parties to a trust:

1. Founder/donor/settlor: the founder creates the trust and transfers all ownership and control of identified assets to the trust.

2. Trustees: the trustees administer and control the assets on behalf of the beneficiaries.

3. Beneficiaries: these are the people who benefit from the trust.

TYPES OF TRUSTS

Generally, there are two types of trusts:

1. A testamentary trust formed in terms of your will.

The terms of this trust are set out in your will and the trust comes into existence only after your death. Your will becomes the trust instrument. In many instances this type of trust seeks to protect the interests and inheritance of minors or vulnerable members of the family (such as elderly parents or spendthrift children who are over 18) after the death of their parents or financial provider. It does not provide any protection for your assets during your lifetime.

2. An inter vivos trust (also called a living or family trust) formed during your lifetime.

You can set up this type of trust at any time. The trust instrument will be a trust deed that contains the terms of the trust. It is a wealth structuring tool that is used for various purposes and protects assets across generations if you want to leave such a legacy. It can also support beneficiaries financially during and after your lifetime.

DO YOU NEED A TRUST?

Here are some situations where trusts may or may not be the answer. What we suggest are mere illustrations. It is important to get proper advice that considers your circumstances and needs and that unpacks the costs of transferring assets to a trust, such as capital gains tax, transfer duty, and securities transfer tax.

Muller is head of fiduciary advice at Nedbank Wealth Management.

EXAMPLE 1: JANE AND JOHN Circumstances and needs

Jane and John are married under an antenuptial contract with the accrual system. They have two children under the age of 18. During their marriage Jane acquires a business interest in her personal capacity and a share portfolio. John owns a share portfolio and is a salaried employee.

What are the benefits of an inter vivos trust for them?

If they transfer the share portfolios into a trust, they will achieve the following:

● Separation of assets.

● Protection against insolvency.

● Continuity – assets will not form part of their estates.

● Pegging of the growth in the value of assets.

● Protection for dependants.

● Generational planning.

EXAMPLE 2: ALFONSO Circumstances and needs

Alfonso is 28, single and does not have any children. He owns a primary residence valued at R2 million. He has spent his bonuses on travel and has no investments.

Does Alfonso need a trust?

No, Alfonso would not benefit from the primary residence exclusion if the trust disposed of the property. The costs of establishing and funding a trust, together with the ongoing costs, do not warrant the establishment of a trust at this stage.

EXAMPLE 3: EMILY Circumstances and needs

Emily is 45, single and has a son, Victor, who is not financially responsible. He has not been able to stay employed for long periods and is easily influenced by his friends. Emily is concerned that Victor may not be able to manage his inheritance when he receives it.

Should Emily consider establishing a trust?

Yes, Emily can either leave the assets to a testamentary trust in terms of her will or create an inter vivos trust during her lifetime. Victor would be a discretionary beneficiary of the trust. The assets would be protected in the trust, and Emily will be protecting Victor from himself and anyone that may influence him.