WHY SHOULD YOU START A TRUST?

At a certain point, we have all heard trusts being discussed amongst the rich and amongst the famous. Trusts are popular due to the many advantages they afford insofar as wealth creation and preservation are concerned. However, what is a trust? What kind of trusts are open to a person hoping to register one? What are the advantages of having a trust? In this article, I explore these concepts.

What is a trust?

In terms of section 1 of the Trust Property Control Act 57 of 1988 (as amended), a trust is defined as the arrangement of property through which the ownership thereof, as held by one person, is by virtue of a “trust instrument”, made or bequeathed to another person (the trustee) in whole or in part, to be administered or disposed of according to the provisions of a “trust instrument”. Such property may be bequeathed to – 

1. the trustee for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument (this is a trust in the strict sense); or 
2. to the beneficiaries designated in the trust instrument, which property is placed under control of the trustee, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument (this is a trust in the narrow sense).

According to section 1 of the Trust Property Control Act, a “trust instrument” is defined as a written agreement or a testamentary writing or a court order according to which a trust is created. “Trust property" is defined as any movable or immovable property, and includes any interests in property, which in accordance with the provisions of a trust instrument, are to be administered or disposed of by the trustee. While the ownership of the trust property vests in the trustee (when in the strict sense), it does not form part of the trustee's personal estate.

A trust is not a juristic person in law like a company or a close corporation. It does, however, have some quasi-juristic personality as a trust, it can be sequestrated and immovable property can be registered in the name of a trust.

Trusts can be divided into two main groups, namely mortis causa trusts and inter vivos trusts. Both types are created during the founder’s lifetime, however, the fundamental difference between the two is when they operate. Mortis causa trusts only operate after the founder’s death and usually created by a Last Will and Testament, while inter vivos trusts usually operate during the founder’s lifetime and even after his/her death.

What are the advantages of a Trust?

Estate Duty: When the founder of a trust donates property to a trust, the property no longer falls into his/her estate. Consequently, the estate duty payable upon the founder's eventual death will be less.

Income Tax: When the founder donates income generating assets to the trust, he/she minimises his/her income tax liability since the property so donated no longer falls into his/her personal estate. The income generated by the trust property so donated is taxed in the hands of the trustee and the beneficiaries. 

Donation tax: In terms of the Income Tax Act 58 of 1962 (as amended)(the ITA) property disposed of under a donation in terms of which the donee will not obtain any benefit thereunder until the death of the donor is exempted from donation tax. As such, no donation tax is payable in respect of donations and the proceeds thereof, which are kept in the trust for as long as the donor lives. No donation tax is payable, furthermore when property is disposed of under a donation as a donation mortis causa. In terms of the ITA, no donations tax is payable in respect of the value of property which is disposed of under a donation if such property is disposed of in pursuance of a trust. As such, any distribution of trust property to beneficiaries is not regarded as a donation for purposes of donation tax.

Inheritance of minors: Another advantage of a trust is that inheritances of minors and persons without contractual capacity can be incorporated into a trust in order for such property to be properly managed and maintained by the trustee on behalf of the minor or person without contractual capacity.

In conclusion and as seen from above, trusts are a good way of creating and preserving wealth and should be considered by individuals, particularly families, when thinking of estate planning.

Please note that the above is a general overview of what a trust is as well as the notable advantages thereof. Depending on the facts of the matter, certain aspects may differ. The reader is therefore advised to consult with an attorney and notary where necessary for purposes of drawing up a trust deed and registering a trust.