Trusts are legal arrangements through which one person (or institution) called a "trustee", holds the legal title to property for another person, called a "beneficiary".
Trusts can be used to distribute property before death, at death or afterwards, and usually has two types of beneficiaries: one that received income during their lives and one that receives whatever is left over after the first set of beneficiaries die.
Testamentary trusts are the most common trusts in use in south africa. They are especially suited to the protection of the interests of minors and other dependents you are not able to look after their own affairs and only come into being after the death of the testator. The trust is formed by placing a trust clause in a will which serves the same purpose as a trust deed.
Testamentary trust may be a discretionary or vested trust.
Payment or income capital is subject to the discretion of the trustees and all non-allocated income is taxable in the hands of the trust. Therefore, this type of trust can be used to save income tax by splitting incomes. Capital beneficiaries may be determined at a later stage.
The income and capital of beneficiaries are already determined and described. The income is taxable in the hands of the income beneficiary, who could also be the capital beneficiary. Therefore, the capital beneficiary has immediate property rights which is subject to the terms of the wall or Trust Act.
These types of trusts are ideal for keeping growth assets out of your estate and are a superb medium to limit estate duty and to protect assets from generation to generation. A living or inter vivos trust comes into being during the lifetime of the settlor or founder with the signing and registration of a trust.
A living trust can take several forms:
This type of trust comes into being through an agreement between the founder and the trustees. Assets are sold to the trust and a loan account is created. These assets can also be donated to the family trust, but these have donation tax implications. The trust may obtain other assets through purchases or an inheritance.
A charitable trust is classified as non-taxable in terms of the Income Tax Act. Capital loans are made to a trust, which the trustees then uses to make donations to charities, schools, churches etc. on your behalf and according to your wishes. Since no income tax is applicable, you may make large donations.
Umbrella trusts are linked to and used by life insurance and retirement fund group schemes. This allows unapproved funds to be deposited as death benefits to beneficiaries who are unable to handle their own affairs.
When minor children are the beneficiaries of life policy proceeds, insurers are obliged to pay this money to a natural or legal guardian to manage on the children's behalf. However, if the guardian mismanaged or misappropriated these funds your children would not get the full benefit of the money you planned for them to inherit. Thus, nominating a trust is the ideal solution.
Special trusts are taxed at the same rate as a natural person and may only be created to benefit a person suffering from serious mental illness as described in the Mental Illness Act, No. 18 of 1973, or who suffers from serious deformity.
Testamentary trusts benefiting any living family member, of whom the youngest turns 21 in a tax year, may also be classified as a special trust.
For any queries regarding Trusts, or with assistance in creating a trust, contact the Trust Experts at Van Deventer and Van Deventer Incorporated.
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