3 disadvantages of a trust you may not be aware of

Considering a trust? Consider these 3 disadvantages first

In a trust, assets are held by the trustee/s for the beneficiary or beneficiaries, on the instructions of the owner of the assets. There are many advantages to holding assets in a trust. But are there any disadvantages? While the advantages definitely outweigh the disadvantages, there are three key issues to be aware of before registering a trust. 

Historically, trusts have had a reputation as a tax avoidance tool for the rich. The tax benefits have largely disappeared, due to changes in legislation. Is a trust still a viable way to hold property? The main benefits are asset protection and estate planning. What is the downside? 

Three main disadvantages of trusts

• Relinquishment of control 

Assets are transferred to the trust and managed by the trustees for the benefit of the beneficiaries in accordance with the provisions of the trust deed. This means that the assets no longer belong to the original owner. The trust is not permitted by SARS to simply be the alter ego of the donor. SARS requires evidence that the owner has relinquished control and may allocate the income of the asset back to the owner for tax purposes if the tax authority believes control has not been sufficiently surrendered.

All family trusts require at least one independent trustee. This is a person who is not related or connected by blood or otherwise to the trustees, beneficiaries or donor. This trustee is obliged, when appointed, to inform the Master about any changes in the beneficiaries of the trust. The independent trustee must also provide, on request, any information the Master requires regarding the affairs of the trust.

A trust does not exist for the benefit of the donor. Trustees can only distribute the assets of the trust to the beneficiaries in accordance with the trust deed. For this reason, careful drafting of the trust deed is vital. Similarly, trustees should be chosen with care, and not merely for their status or connection with the family. Trustees who don’t act from the right motives can put the effective administration of the trust at risk.

To ensure good governance and independence, no one can be the sole trustee and sole beneficiary of a trust.

• Costs

It costs between R6 000 and R15 000 to register a trust. Then there are other costs, such as the trust bank account and administrative costs. Annual financial statements and tax returns must be prepared, but a trust does not ordinarily require an annual audit unless requested by the Master.

• Taxation

Trusts are taxed at a rate of 45%. This is higher than individual tax rates, which range from 18% to 36.7%, depending on income and age. It is also higher than company tax, which is currently 28%, though due to be reduced to 27% from 1 April 2022.

Capital Gains Tax on trust assets is currently 36%, compared to the individual CGT rate of 18% and company rate of 22.4%. 

Seek expert help

Legal advice is essential if you want to establish a trust. Cape Town law firm Simon Dippenaar and Associates can help you with all aspects of trust registration and administration. Give attorney Simon Dippenaar a call on 086 099 146 or email sdippenaar@sdlaw.co.za.

Further reading:

• How to register a trust – the procedures and costs involved
• The benefits of setting up a trust
• Trust-to-Trust: when trust assets are at risk during divorce
• 7 advantages of holding assets in a trust
• Trusts – frequently asked questions

Simon Dippenaar

https://www.sdlaw.co.za

Cape Town attorney Simon Dippenaar has a BBusSc LLB degree and Professional Diploma in Legal Practice from the University of Cape Town, and is an admitted attorney of the High Court of South Africa. He is the founder and director of private legal practice, Simon Dippenaar & Associates, with offices in Cape Town and Gauteng representing South African and international clients.

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