Administration of Trusts

The administration of trusts is governed by the provisions of the Trust Property Control Act no 57/1988. There are two types of trust, e.g. an inter-vivos trust and a testamentary trust:

(a) an inter- vivos trust is created between living persons;
(b) a testamentary trust derives from a valid will of a deceased.

Parties to a Trust

• Trustees
  The trustees are the custodians of the assets in the Trust, but do not necessarily have an interest in the assets. In order to promote the independence of the Trust, it is advisable to appoint at least one independent trustee.
• Beneficiaries
  The beneficiaries are the individuals / entities entitled to benefit from the Trust assets or income.
• Donor / Founder
  Person setting up the Trust

Benefits of a Trust

The two main advantages of having assets in a trust are:

• Asset protection (Protection of assets from creditors)
  In an ideal situation, since assets held by the trust aren’t owned by the trustees or the beneficiaries, the creditors of trustees or beneficiaries can have no claim against the trust (there are exceptions). A common scenario of using living trusts for asset protection is a husband and wife acting as trustees along with a third unrelated trustee. The trust is granted a loan equal to the value of their assets, then the trust buys their assets using the loan, and finally the trust pays off the loan over time.
• Continuity (A trust can span multiple generations)
  When any of trustees die, the trust and any assets owned by it, remain unaffected. Upon the death of a beneficiary, only the portion of the trust assets that vests in that beneficiary upon date of death would form part of the beneficiary’s estate for estate duty purposes.

Tax Considerations

(For tax years commencing 01 March 2012)

In terms of South African tax law, living trusts are considered tax payers. Two types of tax apply to living trusts, namely:

• income tax – payable at a flat rate of 40% (individuals pay according to income scales), and
• capital gains tax (CGT) – payable at the rate of 26.6% (individuals pay 13.3%).
• estate duty – trusts do not pay estate duty (tax payable by a deceased estate). Trusts may be required to pay back outstanding loans to a deceased estate, in which the loan amounts are taxable with deceased estate.
• The trust’s income can be taxed in the hands of either the trust or the beneficiaries (a valuable tax planning tool).