In our series on trusts we have discussed some basics that we need to understand when looking at trusts as well as the reasons why people use trusts as a tool in their financial planning. We will conclude this series by now shifting our focus to look at some types of trusts structures in South Africa.
Testamentary Trust
A testamentary trust is created through a will and comes into effect upon the testator’s death. This type of trust allows the testator to specify how their assets will be distributed and managed for the beneficiaries, often with a focus on protecting and providing for minor children or vulnerable beneficiaries. The trustee will manage the assets until the beneficiaries reach a certain age or meet specific conditions.
How It Works:
- The trust is established in the testator’s will, specifying the beneficiaries and the conditions under which they can access the assets.
- After the testator’s death, the will is probated, and the trust is activated.
- The appointed trustee manages the assets according to the trust’s terms, ensuring the beneficiaries’ needs are met.
Living (Inter Vivos) Trust
A living trust, also known as an Inter Vivos trust, is set up during the lifetime of the trust founder. Its primary purpose is often to protect and manage assets during the founder’s lifetime and for the benefit of beneficiaries after their death. Living trusts can be revocable or irrevocable. Revocable trusts can be modified or terminated without permission from the beneficiaries or a court order. They do however come to an end at the time of the founder’s death. Irrevocable trusts are permanent in nature and will last even after the founder passes away.
How It Works:
- The founder drafts a trust deed, setting out the trust’s terms, appointing trustees, and naming beneficiaries.
- The founder transfers assets into the trust, relinquishing legal ownership while retaining beneficial interest.
- The trustees manage the trust’s assets and distribute income or capital to the beneficiaries as outlined in the trust deed.
- Living trusts are required to register as taxpayers with SARS and submit annual income tax returns, disclosing all income earned and expenses incurred during the tax year. CGT events, donations, and other transactions must also be accurately reported to ensure compliance with tax laws.
- Assets held in a properly constituted living trust may not form part of the deceased’s estate for estate duty purposes, subject to certain conditions and anti-avoidance provisions.
- Donations tax is levied on donations made to a living trust. This tax is payable by the person making the donation, not the trust itself.
Discretionary Trust
A discretionary trust offers flexibility in distributing income and capital to beneficiaries. The trustees have discretion in deciding when and how to distribute assets among beneficiaries based on their needs and circumstances.
How It Works:
- The trust deed provides guidelines for the trustees on how to exercise their discretion in distributing income and capital.
- Beneficiaries do not have a fixed entitlement, but the trustees can allocate assets based on their assessment of beneficiaries’ requirements.
Vesting Trust
In a vesting trust, the beneficiaries have fixed entitlements to the trust’s assets, which typically vest at a predetermined age or event.
How It Works:
- The trust deed specifies the age or event at which the beneficiaries will gain full ownership of the trust’s assets.
- Until the vesting event occurs, the trustees manage and safeguard the assets on behalf of the beneficiaries.
Special Trust
A special trust is designed for beneficiaries with special needs, such as individuals with disabilities or vulnerable dependents. This type of trust often provides financial security and care for these beneficiaries.
How It Works:
- The trust deed defines the special needs of the beneficiaries and outlines how the trust’s assets should be used to meet those needs.
- Trustees manage the assets and ensure the beneficiaries receive the necessary support and care.
- While other trusts are taxed at a flat rate of 45%, special trusts are taxed on a on a sliding scale of 18% to 45%.
Charitable Trust
A charitable trust is established to benefit specific charitable causes or organisations. It is created with the intention of promoting education, relieving poverty, supporting healthcare, or advancing other charitable purposes.
How It Works:
- The trust deed identifies the charitable purposes and organisations that will benefit from the trust’s assets.
- Trustees manage and distribute the assets in line with the trust’s charitable objectives.
- Charitable trusts may qualify for exemption from Income Tax and Capital Gains Tax provided it carries out the activities of an approved public benefit entity.
Trusts are versatile legal structures in South Africa, providing a range of benefits for estate planning, asset protection, and charitable endeavours. Understanding the different types of trusts and how they function is crucial when planning your financial affairs. As trust laws are complex and vary across jurisdictions, it is advisable to seek advice from qualified legal professionals to ensure the appropriate trust structure is chosen to meet specific objectives and comply with all legal requirements.
