I would like to create an inter vivos (between people who are still alive) trust. What are the disadvantages and advantages of this kind of trust? I also want a normal trust account for my kids.
Tanya Cohen, head: Glacier fiduciary services, a division of Glacier by Sanlam, responds:
My recommendation is that you consult a specialist estate planning adviser who has sufficient knowledge and experience in the matter to assist you and to decide whether you are a candidate to create a trust. Setting up a trust should always be considered in the context of your overall estate planning objectives.
If no trust has been created for your children, you cannot open a trust account for them at a financial institution. You must either open accounts for each of them in their own name with signing powers for you, or open separate accounts in your name and bequeath each account to a child in your will.
When you consult with your specialist adviser, here are some of the advantages and disadvantages you should take into account:
A discretionary trust is extremely flexible, and can be administered to take into account changes over time in family, financial and legislative circumstances.
This means the trustees can manage the trust’s assets in the best interest of the beneficiaries at any particular time by taking into account all relevant factors. This flexibility caters for such uncertainties as divorce, insolvency, increase in family size or fortunes, and of course annual changes to tax legislation.
If created and operated with care and with appropriate advice from tax experts, a trust can be administered so as to mitigate taxes such as estate duty, income tax, capital gains tax, donations tax and transfer duty (depending on the relationship between the settlor – the person who establishes a trust and transfers assets into it – and the beneficiaries) for both the settlor and the beneficiaries.
Also, the assets owned by the trust will not be subject to estate duty, capital gains and executor’s fees on the death of the settlor.
Estate and succession planning:
Trusts provide for the creation of flexible succession arrangements.
Also, the assets owned by the trust will not be subject to cumbersome and often lengthy legal procedures after your death, as is the case with the administration of assets in your personal estate. Trust assets are accessible at all times, while assets in your personal estate are frozen during the estate administration process.
Family asset management:
A trust can provide a centralised asset management structure and controlled distributions for beneficiaries who are not in a position to manage assets themselves. This may be due to minority, disability or prodigality. A trust can provide for joint ownership of indivisible assets like holiday homes and farms.
Should the estate owner subsequently be mentally incapacitated through sickness or injury, a trust prevents the need for the appointment of a curator bonis (a person appointed by a court to manage finances) to take care of the founder’s affairs.
A properly set up and administered trust can help a family to protect assets from potential creditors, although care must be taken to ensure that transfers of property are not made in such a way as to prejudice creditors.
The manner in which assets are transferred is also important and relevant to the extent of the protection. For example, if you transfer an asset on a loan account, the amount of the loan account will remain an asset in your estate until the trust repays you. That means that the amount of the loan account will not be protected from creditors, only the increase in the value of the asset during the period of the trust’s ownership of the asset.
However, over a period of time, as the value of the trust’s assets goes up and the value of your loan account goes down, so will the benefit of asset protection be established. Remember also that the ownership of the asset by the trust also means that it will not fall into your beneficiaries’ personal estates on your death, ie the asset will be protected from creditors of your beneficiaries.
Choosing the right trustees:
By choosing your trustees wisely, you can ensure professional asset and investment management and that your assets are taken care of when you are not around or able to look after them yourself.
Potential disadvantages include the following:
– The settlor will lose control of the underlying assets. To set up a valid trust, a settlor must intend to and actually transfer legal (although not beneficial) ownership of the trust assets to the trustees.
This means that the trustees then must administer and control the trust assets.
The security the settlor then has regarding the management of the assets is that the trustees are legally bound to comply with the terms of the trust deed and with their fiduciary duties.
This means that the trustees may only distribute assets to the beneficiaries as defined in the trust deed, and in the manner it prescribes. They are also obliged at all times to act in the best interests of the beneficiaries.
– Higher tax rates apply to income and gains retained by the trust. Capital gains tax is payable in the trust at an effective rate of 20%, and there are no abatements. Income retained in a trust is taxed at 40%. However, accurate application of the anti-avoidance provisions and income splitting can facilitate overall tax savings rather than additional tax.
– Taxes and costs incurred in setting up the trust and transferring the assets to it. You need to assess whether these costs are outweighed by the long-term benefits.
– Establishing a trust generates additional administrative costs and complexity in your affairs. It can be difficult to find dedicated and knowledgeable independent trustees. And if not set up and administered properly, you run the risk of the trust being regarded as a sham (or as not having been established in the first place), in which case the benefits of asset protection may be lost.
In summary, trusts are not appropriate for everyone. However, if set up and administered properly, they still provide real and substantial advantages which could benefit you and your family.
Make sure you obtain expert and independent advice before making the decision.