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A short discussion on the nature and structure of a trust as well as its advantages and perceived disadvantages.

In the discussion below we are only going to focus on discretionary inter vivos or living trusts, where we will refer to this form merely as a trust.


Definition

An inter vivos or living trust can be defined as a legal relationship created by way of a contract (the trust deed) between the founder and the nominated trustees to hold assets and liabilities for the benefit of a third party, being the beneficiaries.


Structure
A trust is thus not a legal entity as such but has legal standing and can transact through the trustees.

As the trust is thus a form of a contract or trust deed, which also serves as the trust's constitutive charter, the trust does form part of your estate and this simple reason is where most of the trust's advantages spring from.

The contract or trust deed is between the founder (the person whose intention it is to structure the trust) of the trust and the trustees, of which one must be an independent trustee or the trust may be seen as an extension of the trustees or founder's estate, for the benefit of the beneficiaries. The trustees have all the powers and obligations as to the control of the trust assets, thus the trustees have the discretion as to how the trust assets is to be used (hence a discretionary trust).

The beneficiaries in a discretionary trust only have a hope of receiving any benefit from the trust as to the trustees' discretion and have no vested rights to the trust assets.

Advantages
A properly drafted trust, managed correctly, has the advantage of protecting the trust assets, if they are unencumbered, from creditors in your personal estate. This is in fact due to the trust not forming part of your estate.

A properly drafted trust has the further advantage of diminishing taxes in your deceased estate as the trust assets will not form part of your estate and capital gains tax upon death and estate duty will not be levied on the value of the assets. Executors' fees in a deceased estate will also not be charged over assets held in a trust.

Effective succession will be establishing due to no estate freezing taking place as the trust does not form part of a deceased estate.

The conduit principle in the Income Tax Act makes provision that trust income can be split between beneficiaries and thus the tax burden can effectively be spread out in the hands of different people to lower the marginal rate on which the income will be taxed.

Disadvantages
The disadvantages to a trust are largely perceived, two being foremost to most discussions we have with prospective clients.

Firstly, the principle that you cannot act alone in the trust and need all the trustees' signatures is largely true. All trustees should act jointly as described in the Niewoudt v Vrystaat Mielies case. This is a core principle to trust law and cannot be circumvented. As long as all the trustees take note of this fact and apply the rule, this perceived disadvantage is possibly the reason the trust will offer protection against creditors in your personal estate.

Secondly, there is a perception that a trust has very high running costs. Although a trust has running costs it is not nearly as high as is perceived. The running costs consist of an independent trustee and an accounting officer. The accounting officer does not need to be an auditor and thus the fees can be those of a normal accountant. The independent trustee normally has a small retainer fee yearly and does not necessarily charge a professional fee per transaction.


If you need to set up an appointment to see one of our trust advisors please contact:

Ryno Venter (Western Cape, Eastern Cape, Northern Cape and Kwazulu Natal)
+27 21 852 5535
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Jolandi Vermeulen/Raymond Sloane (Gauteng, Limpopo, Mpumalanga, North West and Free State)
+27 12 665 5809
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Last modified on Thursday, 25 September 2014 11:14

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