Trusts are useful legal entities for financial and estate planning – frequently asked questions about trusts
A trust is a useful financial planning tool, but many people are confused or daunted by the thought of setting up a trust. This article answers the most frequently asked questions by clients about trusts.
1. What is a trust?
A trust is a legal arrangement in which assets are held by one party (the trustee/s) for the benefit of another (the beneficiary/beneficiaries) on the instructions of the owner (the donor/founder/settlor).
2. How are trusts governed and administered?
Trusts in South Africa are governed by common law and the Trust Property Control Act, Act 57 of 1988, and are administered by the trustees in accordance with the trust deed.
3. What different types of trusts are there in South Africa?
There are two types of trust, inter-vivos trusts and testamentary trusts. An inter-vivos trust (or living trust) is a trust created between living persons. A testamentary trust (or trust mortis causa or will trust) is created in the will of a deceased person (“the testator”) and comes into existence on the death of the testator.
4. How do I set up a trust?
Contact your attorney, auditor or other qualified person.
5. What documents do I need to lodge with the Master to register a trust?
- Original trust deed or notarial certified copy (usually filed in duplicate)
- Proof of payment of the applicable fee (currently R100) payable to the Department of Justice and Constitutional Development)
- A completed Trust Registration and Amendments Form (J401). This is the Trust Application Form which contains details of the name of the trust, where the trust assets are situated, the possible duration of the trust, the number of trustees, the source of trust funds, whether an annual audit is required or not, contact details of all the trustees, details of the founder/settlor and details of the trust auditor
- Beneficiary Declaration (J450 form), which lists the beneficiary’s/beneficiaries’ details
- Completed Acceptance of Trusteeship forms (J417)
- Acceptance of Auditor’s Application (J405) form (if applicable)
- Certified copies of the identity documents of all trustees
- Certified copies of the identity documents of all beneficiaries
- A bond of security by the trustees – form J344 PDF (if required by the Master) or proof of exemption from having to furnish security to the Master. The exemption from having to lodge security is usually expressly contained in the trust deed
- If the inter-vivos trust is a family trust, a sworn affidavit by an independent trustee is needed. The affidavit is an undertaking by the independent trustee, who is not a family relation to any existing founder/settlor, trustee or beneficiary, to provide the Master on request any information the Master may require in connection with the affairs of the trust.
6. How much does it cost to register a trust?
Between R6 000 and R12 000.
7. What are the advantages of holding assets in a trust?
- Asset protection – a trust is the only entity that benefits from total asset protection, thus ensuring it stays out of the clutches of creditors
- Estate planning and continuity – a trust survives the life of an individual (donor/trustee/beneficiary) and can span multiple generations. Because assets in a trust no longer fall into the donor’s personal estate, they are not subject to estate duty on death
- Saving of executor’s fees – trusts can largely avoid the need for costly estate executor fees (which can be up to 3.5% of the gross value of the estate excluding VAT plus 6% of the interest collected after the deceased’s death)
- Confidentiality – a trust is a confidential document, as opposed to documents like wills and records of deceased estates, which are public documents and therefore open for inspection
- Control over assets – a donor can maintain a measure of control over assets by appointing competent professionals (the trustees) to manage and maintain the assets in accordance with the donor’s directives
- Flexibility – some testators do not want their assets to pass outright to their beneficiaries, thus avoiding disputes among heirs. Instead, they prefer to make more personalised arrangements. This could be providing a source of income for a spouse for life, making provision for the education of minor children but not giving them access to capital until later in life, or dealing with heirs with special needs
- Continuous source of income – unlike an estate, where the assets of the deceased are frozen pending the appointment of an executor, a trust can continue to provide a source of income for the deceased’s dependants.
8. What are the disadvantages of holding assets in a trust?
- 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. The assets no longer belong to the donor, who must relinquish control.
All family trusts require at least one independent trustee who is not related or connected in blood or otherwise to the trustees, beneficiaries or donor. This independent trustee is obliged, when appointed, to inform the Master about any changes in the capital/income beneficiaries of the trust and to provide the Master, on request, any information the Master requires.
Trustees can only distribute the assets of the trust to the beneficiaries in accordance with the directions in the trust deed. Therefore the trust deed must be very carefully drafted. Similarly, trustees should be chosen with care. To ensure good governance and independence, no one can be the sole trustee and sole beneficiary of a trust.
In addition to the cost of registration, there are other costs to consider, such as maintaining a trust banking account and administrative costs (e.g. the preparation of annual financial statements and tax returns).
- Higher rates of taxation
Trusts are taxed at a rate of 45%, which is higher than individual and corporation tax rates. Capital Gains Tax (CGT) on trust assets is currently 36%.
9. What are the duties of a trustee?
According to common law duties, trustees must:
- Act within the scope of their authority in terms of the trust deed
- Properly identify the beneficiaries of the trust
- Make sure the required number of trustees is in place
- Act unanimously with the other trustees
- Make proper distributions to identified beneficiaries
- Hold regular meetings and keep proper records of meetings
- Keep proper accounting records and prepare financial statements and tax returns
- Comply with all applicable legislation (such as the Income Tax Act, the Trust Property Control Act etc.)
- Implement proper systems of internal control
- Invest productively, wisely and in accordance with sound government principles
- Preserve the trust property and keep it free from burdens such as mortgages, pledges and liens
Trustees also have statutory duties in terms of the Trust Property Control Act. They must:
- Act with care, diligence and skill
- Lodge the trust instrument with the Master
- Provide the Master with security/exemption from security
- Obtain written authorisation to act as trustee
- Open a separate bank account for the trust
- Take control of the trust assets and keep these clearly separate from personal property
- Keep proper records and accounts of administration/disposal
Fiduciary duties of trustees include:
- Always exercise powers in good faith, acting independently and objectively
- Always avoid a conflict between personal interests and official fiduciary duties
- Act exclusively in the best interests of all trust beneficiaries
- Fulfil duties impartially and in good faith
- Do not make a profit (directly or indirectly) from trust administration
For more information about setting up a trust
Legal advice is essential in setting up 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 email@example.com.
- How to register a trust – the procedures and costs involved
- The benefits of setting up a trust
- 7 advantages of holding assets in a trust
- 3 disadvantages of trusts
The information on this website is provided to assist the reader with a general understanding of the law. While we believe the information to be factually accurate, and have taken care in our preparation of these pages, these articles cannot and do not take individual circumstances into account and are not a substitute for personal legal advice. If you have a legal matter that concerns you, please consult a qualified attorney. Simon Dippenaar & Associates takes no responsibility for any action you may take as a result of reading the information contained herein (or the consequences thereof), in the absence of professional legal advice.