TRUSTS

A well-planned trust can protect your assets and preserve your wealth.

Ensure that your assets are protected and objectively managed by appointed trustees in the best interest of your beneficiaries with a trust fromNesher Investments.

A trust offers an efficient and flexible way to ensure that your assets are preserved and objectively managed and controlled by appointed trustees in die best interest of your beneficiaries. Each person’s needs are individual and unique and your trust should be planned to meet your specific requirements.

WHAT IS A TRUST?

A trust is a legal agreement between an owner of assets and trustees. In terms of this agreement, the trustees undertake that they will administer the trust’s assets with the necessary care to the benefit of the beneficiaries. It is an efficient and flexible way to ensure that assets are looked after. It also ensures that assets are objectively managed and controlled by appointed trustees in the best interests of the beneficiaries.

The protection of your loved ones’ financial interests is extremely important in the planning of your estate. You want to be sure that your family, especially minors, will be looked after, and that your estate and income tax obligations are kept as low as possible so that your beneficiaries can enjoy the full benefit of your estate.

It is paramount to appoint the right trustees. You have to trust that the trustees will always act in the best interests of the beneficiaries and that the trust will be managed in accordance with legislation and stipulations of a trust act.

A trust’s administration must be transparent to ensure the satisfaction of all concerned.

WHO NEEDS A TRUST?

A - MINORS

If a minor is an heir to an estate where there is no will, or if there is a will but no trust clause, the inheritance must be paid into the Guardians’ Fund of the Master of the High Court. The same happens in the event of a minor being the beneficiary to the death benefits of a policy.

People who cannot take care of their own affairs

Where people are unable to take care of their own affairs owing to physical or mental conditions, their assets must be placed under the protection of a curator. The Master of the High Court will give permission for all expenses as well as the types of investments to be made.

B - OTHER INSTANCES WHERE A TRUST CAN BE USED VERY EFFECTIVELY

Where there are indivisible assets
Certain assets, owing to their nature or circumstances, may not be transferred to more than one person. For example: the Sub-division of Agricultural Land Act, Act 70/1970, currently prevents agricultural land from being sub-divided without the authorisation of the Minister of Agriculture.
To save tax
- Estate duty
  When estate duty assets are transferred to a trust, they no longer form part of your own estate. This means that all growth in the assets occurs in the trust, and not in your own estate, which affects a tax saving in the long term.
- Capital gains tax
  Although capital gains tax is higher in a trust, it is an excellent estate planning instrument. There are ways of deferring the capital gains tax on a trust asset to the trust beneficiaries, so that capital gains tax is levied at an individual rate.
- Income tax
  If non-allocated income is capitalised in a trust, the trust will pay income tax at the present rate of 40%. All income paid out to income beneficiaries will be taxable in their hands at their normal income tax rate.
If your assets grow faster than inflation
Certain investments, such as shares, unit trusts and market-related policies, have the potential to grow faster than inflation. If you retain these assets in your own hands, they could attract estate duty. Preferably, such assets should be in a trust, effectively keeping the growth out of your own estate.
If your family composition is complex
If you’re divorced, or you wish to keep certain assets in your family, this could complicate inheritances and make your will very complex to administer, resulting in unnecessary delays in settling your estate.
To protect assets
A trust can be structured in such a way that it does not vest in your hands and therefore does not form part of your estate. In the event of your insolvency, creditors cannot lay claim to these assets.

TYPES OF TRUSTS

Testamentary trust (mortis causa)

Testamentary trusts are the most common trusts in use in South Africa. They are especially suited to the protection of the interests of minors and other dependents who are not able to look after their own affairs. These types of trusts come into being only after the death of the testator.

The trust is administered by trustees appointed in terms of the will, and is usually ended after a predetermined period or at a determined event, such as a minor turning 18 or the death of an income beneficiary. Assets that form part of an estate may be moved to this trust, with or without limited rights such as usufruct. A testator appoints the trustees in a will.
The trust is formed by placing a trust clause in a will, which serves the same purpose as a trust deed. During the estate settlement period of the deceased estate, the appointed trustees apply for a letter of authorisation at the same office of the Master of the High Court as where the estate is registered.

A testamentary trust may further be both a discretionary or vested trust.

Discretionary trust

Payment of income and/or capital is subject to the discretion of the trustees and all non-allocated income is taxable in the hands of the trust. This type of trust can therefore be used to save income tax by splitting incomes. Capital beneficiaries may only be determined at a later stage.

Vested trust

The income and capital beneficiaries are already determined and described. The income is taxable in the hands of the income beneficiary, who could also be the capital beneficiary. The capital beneficiary therefore has immediate property rights, subject to the terms of the will or Trust Act.

Inter vivos trusts (Living trusts)

Living trusts are ideal for keeping growth assets out of your estate and are a superb medium to limit estate duty and to protect assets from generation to generation. A living or inter vivos trust comes into being during the lifetime of the settlor or founder (the person who takes the initiative to create the trust) with the signing and registration of a trust.

A living trust is formed as an arrangement between the founder/settlor and the trustees. The founder/settlor is the person who takes the initiative to create a trust.

The interested parties in a living trust are the founder/settlor, the trustees, the people or company appointed to take control of the assets and take responsibility for their administration and management; and the beneficiaries who, in terms of the Trust Act, are entitled to the income and/or capital of the trust.

After signature of the trust deed, the trust is registered with the Master of the High Court in whose jurisdiction most of the assets are situated or where the administration is to take place.

A living trust can take several forms:

Family trust
This type of trust comes into being through an agreement between the founder and the trustees. Assets are sold to the trust and a loan account (debt) is created. Assets can also be donated to the family trust, although this carries donations tax implications. The trust may obtain other assets through purchases or an inheritance.

Charitable trust
A charitable trust is classified as non-taxable in terms of the Income Tax Act. Capital loans are made to a trust, which is structured in a way that it pays no income tax. The trustees then make donations to charities, schools, churches, etc. on your behalf and according to your wishes. Since no income tax is applicable, you may make large donations.

Umbrella trust
This kind of trust is linked to and used by life insurance and retirement fund group schemes. It allows unapproved funds (not governed by the Pension Funds Act) to deposit death benefits to beneficiaries who are unable to handle their own affairs, to be managed on their behalf and for their sole benefit, as prescribed by the authorities and relevant legislation.

Guardian’s trust
When minor children are the beneficiaries of life policy proceeds, insurers are obliged to pay this money to a natural or legal guardian to manage on the children’s behalf. If the guardian decides to use the money for other purposes, or mismanages or misappropriates it, your children will not get the full benefit of the money you planned for them to inherit. Nominating a trust is the ideal solution, as benefits payable by life policies to minor beneficiaries can be managed on their behalf, to their sole benefit, by the trustees of the trust.

Special trusts
Special trusts are taxed at the same rate as a natural person and may only be created to benefit a person suffering from serious mental illness as described in the Mental Illness Act, No 18 of 1973, or who suffers from serious physical deformity. In certain cases, testamentary trusts benefiting any living family member, of whom the youngest turns 21 in a tax year, may also be classified as a Special Trust.

Role and Appointment of Trustees

The Trust Property Control Act contains certain provisions with which all trustees must comply. Non-compliance with these provisions may lead to criminal prosecution.

Although it is generally accepted that there will be at least three trustees in inter vivos trusts, two are perfectly sufficient. A trust company may well act as the only trustee.

Because the management of a trust is a big responsibility, it is important that the right persons/institutions act as trustees. Expertise and experience are of the utmost importance since the management of a trust usually spans many years.

DUTIES AND RESPONSIBILITIES

The law requires trustees to act objectively and in the interests of beneficiaries at all times. Trustees must comply with specific legal regulations:

Secret profits: trustees may, under no circumstances, make secret profits or speculate with trust assets
Negligence: trustees must ensure that they have the necessary expertise and show due care when administering trust assets
Good faith: trustees must always act in good faith
Compliance with the trust deed: trustees are legally bound and obligated to carry out the stipulations of the trust deed or the will, in which the aims, powers and responsibilities of the trustees are documented

it's important to appoint the correct person capable of executing these duties and responsibilities.

ADMINISTERING A TRUST

The administration of a trust entails receiving and controlling trust assets, and the protection thereof – which requires that investments are made according to the stipulations of the trust deed, the needs of the beneficiaries and investment principles.

The administration also entails that trustees handle all transactions, and requires that they invest assets without speculating and make regular maintenance payments to beneficiaries.

In terms of the law, trustees are expected to report to:

Fellow trustees, beneficiaries and guardians of minor children
The South African Revenue Service
The Master of the High Court (if requested)

Lastly, the administration of a trust entails that trustees must provide advice to fellow trustees and beneficiaries. Trustees administer a trust themselves. If they cannot or will not do so, they may contract agents to take care of the administration on their behalf.

COSTS

Certain fees are payable during the founding and management of a trust since this is handled by specialists.

The fees are as follows:

A set-up fee to establish and register the trust (for a living trust only)
An acceptance fee for receiving and protecting trust assets
A management fee, calculated as a percentage of the assets under management, collected on an ongoing basis
A closing fee