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.
The advantage of a trust is firstly, that 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 terminate or come to an end, since it has perpetual succession. Estate duty is currently taxed at 20% of the gross estate value. This saving in estate duty can be substantially large, especially for high net worth individuals who are worth millions of rands. Secondly, as the trust’s assets are not owned by the beneficiaries, the creditors of the beneficiaries do not have a claim regarding the assets of the trust. This advantage is especially important for people who are exposed to potential liability. Companies as well as individuals are able to transfer assets to trusts. Lastly, because trusts have perpetual succession, beneficiaries will be able to continue enjoying the benefit of the trust assets even if one of the trustees were to pass away.
The disadvantages are firstly, the costs of setting up a trust, which can be high. It may cost up to R 20 000 to set up a trust. If immovable property is transferred to the trust then transfer duty needs to be paid. The founders of the trust may also be liable to pay Donations tax, which is taxable at 20% of the value of the assets transferred to the trust. Transfer duty is taxed according to a sliding scale. Secondly, trustees could find themselves personally liable for losses suffered by the trust if it can be proven that they did not act with care, diligence and skill in terms of section 9 of the trust Property Control Act. It is important to note that “skill” requires more than just acting in good faith. Trustees may be proven to be 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 of the fact 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 holds all the trustees liable for his negligence.
The founder of the trust needs to recognise that the assets in the trust do not belong to him/her anymore. The assets belong to the trust. Should this loss of control (from founder to trust) 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 66.6% whereas the inclusion rate for individuals is 33.3%. Lastly, 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 or attorney who can assist you in making the correct decision regarding your personal situation.
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