A trust gives smooth transfer of wealth to beneficiaries

Safeguard of assets for minors and spouses

One of the reasons I enjoyed going to university was the sense of responsibility, beyond academic activities, it puts on an individual. Immediately after walking into the gates of varsity you realise that you need money for textbooks, groceries, transport and many other things.

The importance of money also came into play when using taxis to head off to field assignments while most of my classmates, some of whom are trust fund babies, easily hopped into their cars for the same assignment.

When I realised the convenience having a car brought to their lives, the penny dropped about the importance of acquiring a car for one’s child.

Though there are some families who might not break a sweat to buy their children this high-value item due to their advantaged net worth status, the reality is that there are many households that need to save up for years to be able to afford their children a guaranteed comfortable life in future. While most ordinary South Africans won’t need to set up a trust for their children’s education or cars, they are useful for wealthy people who need to plan for their estates and to distribute money to family members, including young adults who have cars at varsity. These wealthy people set up what are known as inter vivos trusts – or trusts set up by a founder while they are still alive. Nedgroup Trust general manager Niven Arendse explains that a trust is a contract between any two or more people, where trustees are appointed to receive, hold, administer and distribute certain trust assets to beneficiaries.

In order to create a valid trust it is necessary to set aside certain identifiable assets for the trust. You can set up a trust with a small donation and then donate bigger assets such as your house or investments to the trust (but watch out for donations tax) or you would sell the asset to the trust (usually by giving the trust a loan that you write down each year by donating the tax-exempt amount). Arendse adds that a trust should be registered at the Master’s Office in the jurisdiction where the account of the trust will be opened. He warns that the downside of trusts is that they have higher tax rates, there may be future changes that you don’t foresee when you write the trust deed, and the trustees could mismanage the assets, among other things.

He says the advantages of trusts, however, include the provision “for the maintenance of a spouse and children in consequence of a divorce order and … to protect family assets”.

Matlhodi Leteane, head of operations at FNB Fiduciary, says trusts are an effective estate planning tool – because your property and investments grow in value in the trust rather than in your estate – and you can safeguard your assets for your beneficiaries.

She says a trust can allow a smooth transfer of wealth from one generation to the next and is also a useful tool to manage and protect the interests of vulnerable beneficiaries such as minors. For salaried people of modest means, this is what you are most likely to use a trust for – if you die when your children are still minors or you have a family member who needs to be taken care of. For them, you can in your will set up a testamentary trust – or will trust – into which the assets, like property and money, can be paid from your estate. Your chosen trustees can then manage the property and money in the trust to provide for your minor children and even for a spouse whom you fear is not good with managing money.

A trust set up for minors or for someone who is mentally or physically disabled is known as a special trust and will pay the same tax that you, as an individual, pay. Leteane says it’s a myth that a trust is only for wealthy people. “Any person can open a trust if they have some form of an asset that they feel needs to be safeguarded for their beneficiaries.”

But, she says, when you consider setting up a trust, you first need to answer two key questions: why and for who?

“Creating a trust to look after the interests of your minor children could be as easy as drafting your will and including a provision for a testamentary trust. However, one needs to ensure that your trust structure suits your unique personal needs,” she says.