TRUSTS : QUESTIONS

A trust is a legal entity that has its own legal persona and can own assets and bank accounts and trade.

It is similar like a Company/Close Corporation, with some differences.

The main purpose of a trust is to hold assets (depending on the type of trust you register), but generally people register a family trust to keep their assets for them so that the trust is the owner of the assets and not the individual person.

To protect your assets, to ensure continuity and to save on taxes.

If your assets are held by a trust, creditors cannot attach your assets for any debt that you may have that you cannot pay.

When you die, there is no disruption in the ownership of your assets or your assets cannot be inherited by people you don’t want to inherit from you in case you forgot to arrange for a will, because the assets are dealt with in terms of the Trust Deed and does not belong to you.

A trust is a legal entity that is registered at the offices of the Master of the High Court.

To start a trust, a person called the donor/founder/settlor donates money/assets (usually R100 will be enough).

The donation of R100 creates the reason for the existence of the trust. When the donor has donated the R100, he does not own it any longer as the trust then became the owner after the trustees have accepted the donation.

A trust deed is drafted and signed by all the trustees. The trust deed sets out how the trust will be managed by the trustees.

It prescribes how the trustees must manage the trust, who the beneficiaries are and when the trust comes to an end.

The Trust is managed according to the rules created in the Trust Deed.  The Trustees will pay out monies to Beneficiaries if there are money to be paid, they will manage the financial affairs of the Trust in such the highest trust and best interest of the Trust.

When the Trust comes to an end, the assets of the Trust are transferred to the Beneficiaries of the Trust who then become the owners of the assets that was originally held by the Trust.

The person who starts the trust (donor) decides when the trust comes to an end.

It can be when the last beneficiary reaches a certain age, or when a certain event takes place or when the trustees decide it must come to an end.

It is your choice if you are the donor.

Any over 18 years old can register a Trust during his lifetime.

A Trust registered during any person’s lifetime, is referred to as an inter vivos trust. The Trust will be created by the Donor who will choose Trustees and Beneficiaries. All this information will be contained in a Trust Deed and the Trust Deed will prescribe how the Trust will work.

A Trust can also be created in somebody’s will. In this case the Trust will only be registered after the person’s death. There will be no Trust Deed as in the case of an inter vivos Trust, but the will of the deceased person will contain the relevant clauses of how the Trust will work, who the Beneficiaries and Trustees will be.  So there will not be a separate Trust Deed because the will is the Trust Deed.

The difference between the two is that you usually register a trust during your lifetime to avoid paying estate duty or protect Beneficiareis (such as children under the age of 18 years)(testamentary Trust)

You usually create a will during your lifetime to protect your assets from creditors or to save on taxes.

A family Trust is a discretionary Trust usually used by families (or other persons of course) to hold assets on behalf of the Beneficiaries of the Trust. The benefits of a Family Trust is that because it is a discretionary Trust, it is a great tool to use for tax planning, saving on estate duty and protecting assets from creditors.

A Business Trust is a Trust that does business like a close corporation or a company.  It is used well in the hands of experienced business owners, but would not suit the needs of persons who just want to protect their assets from creditors.

A Special Trust is a Trust that is registered to provide in the needs of persons who are unable to maintain themselves, such as children under the 18 years or any special needs person that cannot take care of themselves. These Trusts get certain tax benefits that other Trusts do not get.

A discretionary trust is a trust where the trustees have the discretion to pay the beneficiaries or not (or transfer assets to them).

As long as the trustees do not exercise the decision to transfer cash/assets to a beneficiary, there is nothing that a beneficiary can do about it.

If you have children under the age of 18 that will inherit from you after your death, their inheritance will be paid into the Guardian Fund that is managed by the state and we all know what that means….. little if any growth, difficult to get to with lots of red tape and risk…

Therefore it is better if you leave the inheritance to your minor children to be held in trust until they turn 18 years or whatever age you would want to wait for them to inherit from you.

The trustees will then manage the assets/money on behalf of the trust for the benefit of the children and make sure that the children’s maintenance needs are met from the trust.

It is so important that you create a Trust in your will if you have minor children.  If the monies are paid into the Guardian Fund, it is too difficult to get it to the children and they may suffer because of it. If it is paid into a Trust, the Trustees scan easily look after the needs of the children.

A trustee is one of the persons who manage the affairs of the trust.

A Donor decides that he/she wants to create a Trust. This is for an inter vivos Trust (a Trust that is registered during the person’s lifetime).

A Trust Deed will be drafted. The Trust Deed appoints the Trustees, determines the Beneficiaries (the Donor chooses both Trustees and Beneficiaries upfront), and lays down the rules of how the Trust will work, what the Trustees can do and what not, when the Trust will come to an end and when Beneficiaries can get their assets.

The Trust Deed will be drafted by us.  Once signed, it will be lodged with the Master of the High Court. The Master will register the Trust by giving it  a registration number and issuing a “Letter of Authority” which will serve as the registration document of the Trust. The number will be either an IT number or an MT number. IT numbers are for Trusts registered during persons lifetimes (IT = inter vivos) and MT numbers are for Trusts that are registered after a persons death and the Trust was created in the deceased’s will (MT = mortis trusts).

If the Trust that must be created is a testamentary Trust, we send the will to the Master who will then register the Trust in the same the trust is registered after your death by sending the will to the Master of the High Court and the latter registers the Trust.  The Master will also issue a Letter of Authority for testamentary Trusts.

The beneficiaries are the people on behalf of whom the assets are being held in the trust, for example your minor children.

There are income beneficiaries and there are capital beneficiaries.

Income beneficiaries can receive an income from the trust.

Capital beneficiaries are the people who receive the assets (capital) of the trust when the trust comes to an end.

It depends on what the donor decided when he/she started the trust.

If the donor decided that the trust must come to an end when a beneficiary reaches a certain age, the trust will come to an end at end of the day of the beneficiary’s certain age birthday.

If the donor determined that the trust will come to an end when the trustees exercise their discretion to do so, that is when the trust will come to an end.

A trust is great tool to use to protect your assets from your creditors or from a bad marriage.

Protection from a bad marriage (or shall we say a bad divorce) can only happen if your trust is set up carefully and correctly, otherwise there are ways to get hold of the trust assets.

You can also use a trust to save on estate duty and taxes. We cannot generalize here, each person has unique circumstances, so when we discuss your situation, we can advise more on this.

It depends on what else you want to put in the trust and what your personal situation is.

If you are uncertain about your financial future or marriage, or if you earn too much money that causes you to pay high taxes, it is better to put the property in the name of the trust.

This will depend also on whether the property is fully paid or whether there is a bond on the property. If there is a bond on the property, it can be difficult to transfer the property to the trust because the trust may not qualify for a bond based on the required affordability test.

Also, it depends on when you want to put the property in the trust. You are not allowed to sell the property 6 months prior to a sequestration, unless of course the trust pays you full value of the property and actually pays the money to you and the money is paid to the bank to settle the bond.

One should only put a property with a bond in a Trust if the Trust owns no other assets, because if the Trust cannot pay the bond, the Trust will have the same problem as an individual that cannot pay its debt.  This means that the bank will also repossess the property if the bond is in arrears. If the Trust then also owns other assets, the Trust will lose it. So if one wants to buy a property subject to a bond in the name of a Trust, that property should be the only asset that the Trust holds until the bond is paid in full.

A Trust is only a beneficial tool to use if the Trust has no debt.  It is of no use to want to protect your assets by putting it in a Trust, but then incur debt in the Trust. If the Trust cannot pay its debt, the Trust will lose all its assets.

It is possible to transfer the property to the Trust if there is no bond on the property.  The Trust will pay transfer duty and transfer costs again.

We need to have a financial discussion with you before you do that so that one can consider whether the costs will be worth the trouble.

If there is a bond on the property, the property can only be transferred to the Trust if the Trust qualifies to take over the bond. The Trust will have to pass the same affordability test that any individual must pass when it applies for the bond. The Trust should only take over the bond if there are no other assets in the Trust. If the Trust does own other assets that are fully paid, it is not advisable at all to incur debt in the Trust.  It would be better then to register a new Trust and let that Trust apply for a bond, so that the debt stays away from any assets that are being held in an existing Trust.

You can donate your assets to the trust or you can sell the assets to the trust.

If you donate the assets to the trust, you can only donate assets to a total of R100 000 per year without having to pay 20% donations tax.

If your assets are worth more than R100 000, you may want to donate the assets in different tax years but if you don’t want to take the risk by holding the assets in your own name, you can sell the assets to the trust.

If the trust cannot pay you for the assets, the trust can pay it off. But from this tax year (2017) you pay interest on outstanding loans.

Your spouse can also donate R100 000 per tax year.  We need to discuss how to get your assets into the trust as it also depends on what types assets you want to move to the trust.

There are various factors to consider

When the trust is registered, the Master of the High Court gives it a registration number.

Unfortunately there is no central registry system for trusts as it is with companies and close corporations that are registered at CIPC.

This does not however mean that the trust is not a legitimate legal entity, because it is.

The trust should be registered for income tax and should file tax returns each year, even if the trust does not trade and only keep assets.

If it is a trading trust, it is possible to register the trust for VAT.

The trust must be registered for income tax and if income tax is due, it must pay income tax.

Usually if a trust just holds assets and does not earn an income or have a turnover, the trust will pay no income tax.

You should find the person who registered the trust for you and ask for your money back, because he/she failed to explain to you properly the benefits of a trust and how to use and that, is just plain bad service or taking advantage of you.

A trust is not deregistered just because you didn’t use it, it remains a valid entity until the trustees ask the master of the high court to deregister it and they can only do so if they were given the authority to do so.

So your unused trust will still be valid and you can activate it by opening a bank account and depositing the amount that the donor was supposed to donate in the first place as per the Trust Deed. Be careful to use an old trust.

Rather let us have a look at the Trust Deed for you because maybe it needs to be updated or changed. Sometimes it was simply poorly or incorrectly drafted, and if the person that registered the trust for you did not even have the professionalism to explain to you how to use the trust, chances are that the trust deed may be flawed.

A trust is registered by the Master of the High Court and the Master also oversees all trusts.

We will do it for you. We will draft all the necessary documentation, we will arrange signature thereof and we will send it to the master to get registered.

Absolutely not.

Don’t get caught by accountants or so-called trust companies who charge you and arm and a leg to “manage” your trust for you.

If your trust us just a trust that holds assets, there is nothing to manage and you are being ripped off. I’ve heard some of these companies ask up to R6000 per month to “manage” a trust.

Really too expensive, because if the trust only holds assets, all you have to do is manage the bank account and hand in a tax return once a year. The accountant of the trust can handle the tax issues and you can do the rest.

It is not expensive to register a trust no.

Any person over the age of 18 can be a donor.

This is not a blood donor.

This is the person who starts the trust who donates an amount (usually R100) to start the trust.

By deciding you want to register a trust. We will register it and then your trust is ready to be used.

The trust deed is the document that is drafted by us that describes who the trustees are,

what the name of the trust is, what the purpose of the trust is, what the trustees can and cannot do,

who the beneficiaries of the trust are and when the trust comes to an end.

In other words the trust deed dictates everything about the trust.

The trust deed can be change during the lifetime of the donor or if the trust deed specifically makes provision that the trust deed can be changed.

Trustees can, and must, be replaced.

The trust deed will usually dictate what must happen when a trustee dies or resigns.

There are certain steps to follow to replace trustees.

The trust deed will dictate what the minimum number of trustees will be.

You can, but then you must appoint a third independent person such as an accountant, auditor or family friend to be a trustee.

Absolutely any assets you want.

If an asset is under finance (like an instalment sale agreement or a bond), you can only transfer the asset to the Trust if the Trust qualifies to take over the finance.

Indeed it can. If the trust has the cash to buy the house cash, that is the way to go, but if the trust requires a bond to buy a house, the trusts must also pass the test of affordability just like any individual.

A trust can indeed incur debt if it is credit worthy and it can afford to repay its debt.

Yes, a trust can own policies. A good policy to use in the growth of the assets of a trust is an endowment policy.

A trust pays a flat rate of 45% income tax on any income it retains.

Let’s use an example to answer this question.

Let’s say a trust earned an income of R200 000 during particular tax year.

If the trust does not pay the monies out to the beneficiaries of the trust, it means that the trust retained its income and the trust must pay R200 000 income tax on the trust.”

The trust can avoid paying income tax by not retaining its income, but to pay it out to the beneficiaries so that the beneficiaries are taxed.

If there is more than one beneficiary in the trust, then the R200 000 in our example at the previous question can be paid out to all the beneficiaries.

The chances are better that the beneficiaries will pay less income tax.

Only if the trust trades and has a turnover higher than R1million, just like an individual.

If you donate (“give”) your assets or your money away to somebody else or to a place/institution, the Income Tax Act says that you must pay 20% donations tax.

You get the first R100 000 free, so if you donate R200 000 cash in a tax year to somebody, you will only pay 20% donations tax on R100 000 because the first R100 000 is free from donations tax.

Depending on what your trust does, it is very possible to manage your trust.

If it is a family trust that simply holds assets, there is nothing to manage except to make sure that the bank account is always in the black and that the trust’s tax returns are handed in once a year.

If the trust deed allows for it, the Beneficiaries get paid when the trustees decide they get paid, otherwise the trust deed will say when the Beneficiaries will get paid.

An inter vivos trust is registered during your lifetime. A mortis causa trust is registered after your death.

Contact Us