Estate planning is the process of managing, protecting and preserving one’s asset base not only during one’s lifetime, but also thereafter, including the bequest of assets to heirs and the settlement of estate taxes.
A trust can be used as an estate planning tool. 

There are many benefits to this, but also some challenges.  This article will set out how to make sure one’s trust is correctly set-up and complies with the essential requirements as set out in the Trust Property Control Act 57 of 1988.

Setting up a Trust
An inter-vivos trust can be created between living persons and is registered at the office of the Master of the High Court in whose area of jurisdiction the main assets of the trust are or will be held.
The first step to set up a trust is to execute up a valid trust deed. 

This trust deed is a contract between the founder of the trust and the trustees and for the benefit of a third party or parties (known as the beneficiaries of the trust). The trust deed stipulates who the first trustees of the trust are going to be and the Master may insist on at least one independent trustee to be appointed. An independent trustee will not receive any benefit from the trust assets apart from the specified and reasonable trustee remuneration. The deed specifies who the beneficiaries are as well as their entitlement to either the capital of the trust, the income of the trust assets, or both.

A trust deed is subject to all applicable laws as a valid contract.  It is imperative to speak to a legal expert to properly execute and register the trust because a trust has far reaching tax, financial and other consequences.  These consequences will affect you whether you are a trustee, founder or beneficiary. 
All the trustees sign an Acceptance of Trusteeship and this is submitted to the Master of the High Court with copies of their identity documents. 

The trust deed needs to be duly signed and witnessed and also submitted to the Master.  Further requirements and information that needs to be provided to the Master are set out in Form JM21.

If the Master concludes that all the requirements have been met, a letter of authority will be issued to each trustee.  This letter gives the trustees the authority to jointly act on behalf of the trust and deal with its assets.  The trust deed will also specify exactly how assets should be maintained and dealt with in certain circumstances. 
The law and taxation rules constantly change and this more often than not results in unintended consequences for the parties to the trust.  The trust must thus be correctly established and carefully managed at all times.  No amendments can be made to the trust deed without it being recorded at the Master’s office. 

Benefits of a Trust
There are many benefits to using a trust as an estate planning tool and this article will only briefly discuss a few.

1. Remains private

The financials of a trust, generally speaking, remain private and are protected from public inspection, unlike the details of a deceased estate. 

2. Reducing estate duty

Inter-vivos trusts can be used to minimise estate duty when assets that have the potential to increase in value is transferred to the trust.  No estate duty is payable on assets owned by the trust as the asset then belongs to the trust and not the deceased.  This helps to ensure that the growth in these assets does not form part of the deceased estate.  

3. Effective control of assets

A trust is a perfect tool to avoid the misuse of assets by people who are not able to manage the assets effectively.  This includes minors, someone who is incapacitated, suffer from a mental illness or cannot responsibly manage their own affairs.  This is why the appointment of the most appropriate trustees are of paramount importance.  The trustees will administer effective and efficient control over the assets and protect it over time for the benefit of the beneficiaries. 

4. Asset protection

The trust’s assets are not owned by the beneficiaries.  While they enjoy the use and the fruits of the asset, they do not have ownership of it.  This means if an asset was transferred to a trust when the founder thereof was solvent, no creditors can lay claim to such an asset. 

5.  Perpetual succession

The death of a beneficiary does not impact the existence of the trust and the remaining beneficiaries will be able to continue enjoying the assets of the trust.  The trust continues indefinitely provided that it was sufficiently set up.

Disadvantages

1. Costs
Setting up and administering a trust can be a costly exercise and if assets are transferred into the trust, transfer duty and other taxes will need to be paid. So, careful planning is essential.

2. Tax
Any earnings from the assets in the trust are taxed and interest exemptions available to individuals do unfortunately not apply to trusts.  In addition the income tax threshold for trusts are set at 41%.

3. Loss of control
As soon as assets are transferred into the trust, these assets no longer belong to the owner thereof or, in this case, the founder of the trust.  It is important to remember that the trust should never be the founder’s alter ego as this will result in creditors being able to lay a claim thereto. 

4. Trustee duties
Section 9 of the Act clearly makes provision for circumstances where the trustees of a trust can be personally liable for losses suffered by the trust if they did not act with the necessary skill, diligence and care.  Trustees have a fiduciary duty and can be held liable not only if they invested the trust’s assets badly but also if they invested too conservatively causing insufficient capital growth.  

Further Considerations
Due consideration should be given to weighing up the benefits and disadvantages of using a trust as an estate planning tool as it pertains to your particular situation should be carefully considered .  One should also look at one’s financial capabilities and make a calculated decision on one’s future needs and the needs of the beneficiaries to the possible trust. 

Estate planning is an ongoing process and should be started as soon as possible.  The provisions of one’s estate plan should evolve in line with your changed circumstances and with your goals.  Changes like starting a business, acquiring another asset(s), marriage, divorce, having children, children coming of age or death will affect one’s estate plan. 

Conclusion

Lack of adequate estate planning can cause undue financial burdens on the loved ones left behind when you pass on.  It may also result in substantial unforeseen tax liability or costs that cause the estate to become insolvent.  We therefore advise clients to discuss estate planning with an attorney and financial advisor to have a clear understanding of the suitability of setting up a trust as part of your estate plan.

Written by Arinda Truter, SchoemanLaw Inc