Most people think a trust is only for the rich and famous but this is not the case. Everyone who has an asset such as a fixed property or shares that needs to be protected against the woes and risks of life should have a trust. These woes and risks of life come in different forms and usually when it is the least expected to all of us. Two of these risks that are most neglected in many estate plans are protection against financial risks and the risk of family relations that may go wrong. For the first one of these risks namely financial ruin, prevention is always better than cure. This is where the protective nature of the trust comes in as an ideal solution. Therefore the main reason one should have a trust is for financial risk protection. For these purposes there should be a proper separation between a person’s high risk, medium risk and low risk assets and activities to ensure that no creditor or third party can lay their hands on your hard-earned assets.
A second important reason for setting up a family trust is for reasons that we call the “family relationship plan”. This entails that there should be adequate separation of possible interest groups in families with more than one child and also the more complex reconstructed families in second and further marriages/relationships after divorce or death, especially to prevent family feuds when ‘in-laws’ may start turning into ‘outlaws’.
Another popular reason for the use of a trust is for the pegging of the value of one’s estate for future growth in order to minimise the value of the personal assets which is good for protection purposes but simultaneously also a saving on Estate Duty. Despite the higher Income Tax Rate a trust might have compared to natural persons and other entities, there are some tax advantages available to the trustees. However, as the legislature can amend tax legislation at any given time, a trust should not be used primarily to save possible Estate Duty and other taxes. On the other hand one should bear in mind that what might be favourable for tax purposes may not necessarily be favourable for risk protection. The residential home in the personal estate is a good example of this. It may have tax benefits but it can be a disaster when a financial crisis looms.
In addition, the trust can also be used instead of a usufruct or in cases where the subdivision of agricultural land is not possible due to the relevant legislation. It is also recommended that a trust be used for testamentary planning where there are minors involved and their inheritance needs to be protected or where an heir needs some financial protection to safeguard his or her inheritance from the “wheeling and dealings” of a spouse. Where there are persons with special needs (for example a child with a physical or mental disability), the trust is a very useful vehicle to provide for such a person, as this type of trust (the so-called “special trust”) qualifies for certain tax advantages. It is also important to remember that there is no limitation on the duration or continuity of a trust and one can thus make provision for further descendants or generations to come.
Trusts can also be used in the business environment, for example business (share) trusts, workers trusts and BEE trusts. It is also a very popular entity for public benefit organisations (PBO trusts or the so-called charity trust).
It is important to remember that your trust should always form part of your holistic estate plan (which also includes your testamentary planning; financial planning; tax planning; insurance planning, etc.) and should be used primarily as a protecting vehicle before indulging in tax concessions.
Mosdel Parma & Cox
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