A trust can be described as a legal relationship which has been created by the founder who places assets under the control of trustees. This either happens during the founder’s lifetime (inter vivos trust) or at the death of the founder (testamentary trust). This article will focus on the advantages and disadvantages of an inter vivos trust.
Advantages of a trust
Reducing estate duty
Inter vivos trusts can be used to minimise estate duty. No estate duty should be payable on assets owned by the trust as a trust does not die. Estate duty is currently taxed at 20%. This estate duty saving can be substantially large especially for high net worth individuals who are worth millions of Rands.
Protection against creditors
As the trust’s assets are not owned by the beneficiaries, creditors do not have a claim on the assets. This advantage is especially important for people who have exposure to potential liability. Companies as well as individuals are able to transfer assets into trusts. A few years ago, an airline company was liquidated and the creditors never had a claim on the airplanes. This was because the planes were in the name of a trust and the company rented these planes from the trust.
Because trusts never die, beneficiaries will be able to continue enjoying the asset if one beneficiary were to pass away.
The costs of setting up a trust can be high. It can cost R 20 000 to set up the trust. If assets are transferred into the trust then transfer duty needs to be paid. Transfer duty is taxed according to a sliding scale.
Duties of trustees
Trustees could find themselves personally liable for losses suffered by the trust if it can proven that they did not act with care, diligence and skill according to Section 9 of the Trust Property Control Act. It is important to note that “skill” is more than just acting in good faith. Trustees may be proven negligent not only if they invested in risky investments, but also if they invested capital too conservatively causing the capital not to grow sufficiently. Trustees also need to be aware that they can still be held liable if only one trustee has signing power on behalf of the trust and he/she makes a poor decision that finds all the trustees liable for his negligence.
Loss of control
The founder of the trust needs to aware that the assets in the trust do not belong to him/her anymore. The assets belong to the trust. Should a loss of control not occur, the trust may be seen as an alter ego of the founder which could result in the assets being included in creditors’ claims as well as having estate duty consequences.
The earnings from the assets in the trust are taxed at 40% and interest exemptions do not apply to trusts. Also, the inclusion rate for Capital gains tax for an Inter vivos trust is 66,60% whereas the inclusion rate for individuals is 33,30%.
As we can see from the above, a trust is not for everyone. It is important to weigh up the advantages and disadvantages before deciding whether to go ahead or not. The best decision would be to speak to a Certified Financial Planner® who can assist you in making the correct decision for your personal situation.