Types of trusts in SA and the advantages of setting one up

Provided by Dommisse Attorneys Inc.

By Ya-Fan Wong

Topics Tax Law | Wills, Estates & Trusts

08 Apr 2021

A trust is often described as a tripartite legal relationship. A trust is a structure which has been set up by the founder to which property is transferred and is then administered by trustees on behalf of one or more beneficiaries, in accordance with the deed of trust or will (as the case may be).

In terms of the Trust Property Control Act, 57 of 1998, a trust is defined as “an arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed:

(a) to another person, the trustee, in whole or in part, 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; or

(b) to the beneficiaries designated in the trust instrument, which property is placed under the control of another person, 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,

but does not include the case where the property of another is to be administered by any person as executor, tutor or curator in terms of the provisions of the Administration of Estates Act, 66 of 1965.”

Types of trusts in South Africa

There are 3 basic types of trusts, being an Ownership Trust, a Bewind Trust and a Curatorship Trust. More commonly however, trusts are described by the way in which they are formed:

**Living (Inter Vivos) Trust:**

This is a trust which is created during the lifetime of the founder. There are two types of living trusts in South Africa, namely vested trusts and discretionary trusts. In vested trusts, the benefits of the beneficiaries are set out in the trust deed, whereas in discretionary trusts the trustees have full discretion at all times about how much each beneficiary is to benefit. A living trust is created by the drafting of a trust deed and registering the trust (along with various prescribed forms) with the Master of the High Court. The trust becomes effective as soon as it is registered.

**Testamentary (Mortis Causa) Trust:**

As the name suggests, a testamentary trust is one which is provided for in the will of the deceased person. The will itself will stipulate that a trust must be set up upon that person’s death. Testamentary trusts are usually created to hold assets on behalf of minor children for example.

For the purposes of this article, we will focus on living trusts and outline a number of considerations that you should be aware of in this regard.

Asset protection

One of the main advantages of a living trust is the protection of assets from creditors. Since assets held by the trust aren’t owned by the trustees or the beneficiaries, the creditors of the trustees or beneficiaries can have no claim against the trust (there are exceptions). Simply put, any assets that are in the trust are not considered as part of the estate in the case of insolvency. There are also certain tax benefits when dealing with the deceased estate.

Assets can be transferred into the living trust either by a loan or a cash donation. In terms of South African law, a donation to a trust that does not exceed R100 000 within the applicable tax period will be exempt from donations tax (and then levied at 20% once the limit has been exceeded for that tax year).

Tax considerations

There are certain tax considerations to be aware of. A trust will be liable for income tax and capital gains tax (CGT). SARS will require that the trust be registered for income tax as soon as it has been set up. The trust’s income can be taxed in the hands of either the trust or the beneficiary. It is often more beneficial for the income to be taxed at beneficiary level since a trust pays income tax on the highest individual bracket of 45% whereas individuals pay on a sliding scale usually less than that. As regards CGT, a trust will pay tax on the capital gains earned at the rate of 36%, whereas individuals only pay 18%. A trust set-up has certainly become less tax efficient over the years since SARS continuously introduces more stringent measures to clamp down on tax avoidance.

Why should we create a trust? Let us summarise the advantages!

For estate planning purposes, there are a number of advantages in placing assets in a trust. Below is a list of the most important advantages:

The growth on assets transferred to a trust is not subject to estate duty, because the growth belongs to the trust. If you have made use of a loan to the trust, the value of the assets as at the date of transfer remains an asset of your estate because of the loan account in your estate.
A trust does not die. This means that the trust is not liable for estate duty, other taxes or costs, such as transfer duty, executor’s fees, or conveyancing fees, that would otherwise be payable in the hands of the estate or the heirs. Also a trust does not pay CGT as long as an asset is not sold.
Assets / benefits in a trust continue to be paid to the beneficiaries after you die. Assets in the estate may not be freely available to your dependents because the estate is frozen during the winding up process. This means that dependants may only receive an income after your estate is finalised.
Protection of assets. A beneficiary cannot sell a right in a trust (unlike shares in a company for example). If a beneficiary becomes insolvent, the assets in the trust continue to be protected. Likewise, if you as the donor or trustee become insolvent, the trust’s assets remain protected.
Income from a trust can be structured in such a way to provide tax efficiency. For example, R100 000 earned by a trust can be split between five beneficiaries so that they earn R20 000 each. Assuming that they earn no other income, they would pay no tax as this amount is below the threshold. This is the so-called split income principle i.e. income tax is levied against the trust, but income distributed is taxed in the hands of the beneficiary.
Creditor protection in the event of the trust beneficiary’s insolvency. As mentioned before, in the case of a living trust, the assets are not owned by the trustees or beneficiaries and the creditor therefore has no claim against them.