Trusts are well known as tools for estate planning but often misunderstood in terms of their role and usefulness in preserving wealth for family and heirs. Setting up a trust can be a valuable part of preserving and even growing wealth for future generations. They should however not be set up without careful evaluation and sound financial advice because there are circumstances when a trust could prejudice personal financial goals.
With the help of a qualified financial planner, there are three important questions that must be asked by the individual seeking to preserve and ultimately transfer wealth for the benefit of succeeding generations:
- What is the purpose of the trust?
- Which assets should be incorporated?
- Which type of trust would be most appropriate for reaching the individual’s goals?
Floris Slabbert, Director at Ecsponent Financial Services, says trusts are employed for legacy planning as part of a strategy to bequeath assets to next of kin after death. “Like a will, a living, or inter vivos trust is a legal document which sets out your desires regarding your assets, your dependents and heirs. The big difference is that a living trust becomes effective while you are still alive.”
Trusts can involve lots of red tape, and legislation can change substantially, having an impact on the original intention of the establishment of the trust. “Trusts are subject to increased scrutiny from the South African Revenue Service and beneficiaries won’t hesitate to challenge a trust or trustee in court, which places a lot of responsibility on the trustees. The picture becomes even more complicated when business interests are involved,” Slabbert says.
Anyone creating a living trust will need to demonstrate that they are responsibly involved and present at general meetings to deal with changing legislation or assets – it can be a time-consuming affair. “A trust can bring burdens and unexpected taxes. But it can also save a lot of money if it is operated within legal bounds,” Slabbert advises.
A testamentary trust, however, is established through the provisions of a person’s last will and testament. “These provisions set out the details of how your assets must be divided and distributed, including proceeds from insurance policies. There may be more than one testamentary trust per will,” Slabbert explains.
If the purpose of a trust is to make provision for children, he says it would be more beneficial to have a testamentary trust after the person passes away. “Basically, this allows for significant tax abatements, which are capped at R3.5 million – and double that amount between spouses. These abatements could be forfeited if you set up a trust while you are alive and donate the assets to that entity. To benefit fully, careful planning is essential,” he says.
What’s more, living trusts limit beneficiaries who also have to act within the laws of the trust. “They might find themselves in financial trouble, forcing them to sell off trust assets for livelihood. In such a case, again mortis causa would be more useful as it dissolves after certain objectives are met or after a certain time,” he adds.
In short, a trust could be established while you are alive or after death, and each type of trust involves its own tax implications, legislation and intricacies in management.
“It is important for anyone creating a trust to understand the purpose of the trust and the responsibility of the trustee who will effectively manage it on your behalf. There is a misconception that trusts automatically reduce tax burdens, but they can actually do the opposite if they’re not structured properly,” says Slabbert.
Ultimately, a trust should be created with the help of an expert to ensure that beneficiaries benefit from an estate rather than being burdened by it.
To assist more South Africans, gain access to proper estate planning help and advice, Ecsponent Financial Services is offering a free last will and testament drafting service during the month of September.
“We urge everyone to take advantage of this service to help strengthen their financial futures and avoid the many pitfalls that can come with trying to provide for their families after death without professional advice,” says Slabbert.
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