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In very basic terms, a Trust is an agreement initiated by the Owner of a certain asset or assets, whereby the Owner (who) could be called the Founder) appoints certain other people to look after the asset or assets – which the owner now places into the care of the Trust.

There are two types of Trusts:

Testamentary Trust:

This type is established when a Founder wants to create a Trust as part of their Will. This Trust will not be activated until the Founder’s death. Such Trusts are especially common in the case of the Founder having family maintenance responsibilities.

The Trust would take care of the living dependents who cannot receive an inheritance, i.e. Minor Children. A Trust also safeguards the inherited assets of other dependents from creditors’ claims and takes care of the needs of those dependents when the departed Founder cannot.

During the Founder’s lifetime, the assets in the Truth remain completely under the control of the Founder but, after the Founder dies the Trust is activated and comes into existence.

Inter Vivos Trust:

In the other extreme, an Inter VivosTrust is established between the living and managed by the Trustees for the beneficiary or beneficiaries. This means that the Founder is alive whilst the Inter VivosTrust is being administered by the Trustees but relinquishes direct control over the assets held in the Trust.

There are those occasions where Founders are not willing to relinquish complete control of their assets held in Trust; or where the Trust is being used as a tax shelter. In such cases where Founders or Trustees fail to honour the true nature of the Trust structure, the act of transferring assets to the Trust in an attempt to safeguard said assets is unlawful. Such cases make a mockery of the whole structure of a Trust which is founded to safeguard assets from the claims of creditors and meeting the needs of living dependants. When such illegal actions take place, they can be reversed by Order of a Court of Law and creditors can still lay claim.

Why Set Up A Trust?

There are a number of advantages to placing assets in a Trust for estate planning purposes.

These advantages include:

  • Saving on estate duty: The growth on assets, such as shares, transferred to a Trust is not subject to estate duty because the growth belongs to the Trust. If you’ve 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 a Trust is not liable for estate duty, other taxes or costs, such as transfer duty, executor’s fees, or conveyance fees, that would be payable in the hands of your estate or heirs. Also, the Trust does not pay CGT as long as an asset is not sold.
  • Fixing value: The value of any assets transferred to a Trust is effectively frozen for estate duty purposes.
  • Trusts continue to pay benefits to Dependents (beneficiaries) after you die: Conversely, assets in your estate may not be freely available to the beneficiaries because your estate is frozen during the winding up process. This may result in your dependents not receiving an income until after your estate is finalised.
  • Protection of assets: A beneficiary cannot sell a right in a Trust (unlike shares in a company). If a beneficiary becomes insolvent, the assets in the Trust continue to be protected (unlike shares in a company). Likewise, if you the donor, or the Trustees become insolvent, the Trust’s assets remain protected.

The careful use of Trusts can also be quite useful in planning for the continuity and stability of both structures and commercial transactions:

Permanence planning can be assisted by holding company shares in a Trust. This move usually ensures business continuity after death, with minimal interruption. By carefully selecting the most appropriate people to be shareholders or directors of your business, and by executing the most appropriate agreements, this could also prevent unnecessary disputes over ownership or sale after your death.

Trusts are also used to safeguard the shareholding of employee share schemes in certain commercial transactions, such as Broad-Based Black Economic Empowerment projects.

Generally speaking, Trusts are not cheap, so only income generating assets are suitable. They are also complex and it is wise to obtain expert legal advice before embarking on such a project.

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