Insights

Does my Trust (or Trusts in general) have a future in South Africa?

by | Mar 5, 2024 | Advisory Services | 0 comments

This is a commonly asked question we have been asked in the past few months in light of the multitude of new legislative reporting obligations imposed upon Trusts for the purpose of addressing the shortcomings in SA’s regulatory framework which contributed to SA’s grey-listing.

In brief, the new rules:

  • Require Trusts to establish and record the Beneficial Ownership of a Trust;
  • Effectively make trustees third-party data providers for SARS

Whilst these unprecedented reporting requirements are set to create a new level of transparency and accountability in respect of those who manage and control Trusts and those who benefit from the Trust assets, these obligations have also substantially increased the administrative and compliance burden on Trustees.  Non-compliance will have dire consequences.

The answer to the question is not straightforward or easy and will depend on many factors including the dynamics and bespoke circumstances of each family.  It is also paramount to revisit, where applicable, the original intentions of the Founder as well as the purpose and objectives of creating the Trust in the first place.  Weighing up the costs, taxes and consequences of winding up your Trust as opposed to adhering to or possibly simplifying matters to better manage the additional compliance and administrative processes, may be a worthwhile exercise to consider.

The above aside, the following practical applications of the Inter vivos Trust reaffirms why Trusts are still useful estate and financial planning tools and still fulfils an important function:

1. Estate “pegging” or freezing of asset values and wealth preservation

This remains one of the cornerstone features of using an inter vivos Trust for estate planning purposes.  Typically, ‘growth’ assets are moved into a Trust to which the donor (Founder), his/her spouse and descendants are discretionary beneficiaries. 

Any future growth in the asset that takes place during the donor’s lifetime, will take place in the Trust and will be excluded from person’s dutiable estate.  This means that the value of the donor’s estate at his death is significantly less than if the growth had taken place in his estate and as a result, his estate duty liability will be limited.

2. Continuity/ efficient and perpetual succession

A Trust is not affected by the death of the Founder and will continue to operate in this event. 

If a beneficiary passes away, there will be minimal or no impact on the future enjoyment of benefits from the Trust by the other beneficiaries.  The trust can be in perpetuity and can continue for future generations and this adds continuity to the estate planning of the family.

3. Limited financial skills of surviving spouse

The interest of a surviving spouse, who may have limited skills in financial matters, is protected.

4. Minor beneficiaries incapable of looking after their own affairs

An inter vivos Trust is ideally suited for the management and conservation of assets on behalf of minors. As opposed to its counterpart, the Testamentary Trust, an inter vivos Trust provides greater flexible and may be amended in the event of changed circumstances.

Furthermore, in court cases where damages are awarded to a successful minor plaintiff and is then payable to the minor’s parent or guardian, there may be real danger of the monetary award being maladministered if the parent or guardian lacks the knowledge and financial skill and expertise to administer the award in a prudent and responsible manner.

5. Asset protection and facilitation of divorce settlements

A discretionary Trust offers protection against creditors or potential claims arising from divorce settlements.

Divorces may involve substantial assets as well as sizeable amounts of maintenance.  In such cases, inter vivos trusts can ensure the proper maintenance of a spouse and children, while at the same time conserving the property for their benefit.

6. Holding non-subdivisible property

There are laws preventing the subdivision of agricultural land and consequently it is very difficult to subdivide farms.  A Trust can be used to provide for several beneficiaries who have different rights of enjoyment and use over a farm.

7.To receive bequests – Estates of spouse and/or children and to receive lump sums

An inter vivos trust could be created and kept dormant (‘freezer Trust’) to receive testamentary or other bequests later.  This is done to alleviate the adverse tax consequences which a substantial inheritance or other bequest could have on the heir by reducing the possibility of them having their own estate duty problem. 

8. Person incapable of managing their own affairs

Setting up a vested Trust could be considered as an option/solution to manage the affairs of a person who has lost mental capacity to make their own decisions.

Conclusion

The above is not an exhaustive list and as mentioned, each family’s circumstances are unique.  Each application above will require an in-depth discussion.

Should you have any questions, please do not hesitate to contact one of Sentinel’s Trust Officer’s.

Sandy De Wet

Trust Executive

CFP®FPSA PGDip in Estate Planning