Trust trusts to carry out the wishes of your will

Tes­ta­men­tary trust of­ten the best op­tion to en­sure fair­ness

Sunday Times - - Business Money - By AN­GELIQUE ARDÉ

● You may think of trusts as the pre­serve of the wealthy, but that’s not en­tirely the case. A trust is a very use­ful ve­hi­cle that can be estab­lished to pro­vide for the needs of mi­nor chil­dren, chil­dren with spe­cial needs, or de­pen­dants who may not be good at han­dling money, in­clud­ing a sur­viv­ing spouse.

You can set up ei­ther a tes­ta­men­tary or an in­ter vivos trust, de­pend­ing on your needs. A tes­ta­men­tary trust may be both nec­es­sary and a cost-ef­fec­tive way to meet the needs of many fam­i­lies.

A tes­ta­men­tary trust is one that is set up on your death through your will. An in­ter vivos trust is cre­ated by way of a con­tract, not a will, and op­er­ates while you are alive.

While you may not need an in­ter vivos trust, if you don’t make pro­vi­sion for a tes­ta­men­tary trust, any money you leave to mi­nor ben­e­fi­cia­ries will go to the Guardian’s Fund, which falls un­der the ad­min­is­tra­tion of the mas­ter of the high court. Mak­ing claims from this fund for the ev­ery­day needs of ben­e­fi­cia­ries can be an ad­min­is­tra­tive night­mare, and the money in the fund is gen­er­ally con­ser­va­tively in­vested.

A tes­ta­men­tary trust can also be use­ful for blended or “re­con­sti­tuted” fam­i­lies, which are fam­i­lies where one or both par­ents have chil­dren from pre­vi­ous mar­riages, says Ad­vo­cate Sankie Mo­rata, the chief op­er­a­tions of­fi­cer of San­lam Per­sonal Fi­nance: Fidu­ciary Ser­vices.

A Money reader, who is twice di­vorced and mar­ried to his third wife, says he has been ad­vised to set up a trust. “I’m turn­ing 68 and near­ing re­tire­ment. I have two chil­dren of my own and two stepchil­dren. None of them are de­pen­dants. When I die, I want to make pro­vi­sion for my wife, but I want to make sure that my as­sets go to my chil­dren,” says the reader, who asks not to be named.

The reader has a house worth sev­eral mil­lion rands, and re­tire­ment sav­ings.

The agents ad­vis­ing him have not spec­i­fied what type of trust he needs, nor the costs as­so­ci­ated with set­ting up or man­ag­ing a trust.

Mo­rata says the reader could con­sider be­queath­ing his prop­erty to a tes­ta­men­tary trust, sub­ject to his wife hav­ing a usufruct on the prop­erty. This gives her the right to live in the house un­til she dies. At her death, full own­er­ship of the prop­erty goes to the trust and, ul­ti­mately, his chil­dren when the trust dis­solves and the prop­erty is dis­trib­uted. “She en­joys use of the prop­erty, even the in­come if she were to rent it out, but she doesn’t have full own­er­ship.”

If he were to leave the prop­erty to his wife, she might not leave it to his chil­dren on her death. The trust en­sures that the as­sets are used as you in­tended and man­aged by the trustees to en­sure their best use for your heirs.

Costs

An­gelique Visser, the vice-chair­woman of the Fidu­ciary In­sti­tute of South­ern Africa and a di­rec­tor at Baraza Wealth, says the cost of set­ting up a tes­ta­men­tary trust will de­pend on the fidu­ciary prac­ti­tioner used.

Many fidu­ciary prac­ti­tion­ers do not charge a fee to reg­is­ter the trust with the mas­ter of the high court but do charge an on­go­ing trustee fee to ad­min­is­ter the trust. Some prac­ti­tion­ers also charge up to 1.5% of the value of the trust as­sets as an ac­cep­tance fee over and above the an­nual trustee fee, which could be up to 2% a year.

“Trustee fees are not reg­u­lated, and it is there­fore highly rec­om­mended that you de­ter­mine what your ap­pointed trustee will charge when a tes­ta­men­tary trust is set up in your will.

“It is also a good idea to set the fees out in your will, lest they be­come quite costly,” Visser says.

Mo­rata says fees charged by trust com­pa­nies vary be­tween about R850 and 1.5% of the as­sets, plus a per­cent­age of the in­come, which is nor­mally 6%. You need to ne­go­ti­ate

You need to ne­go­ti­ate fees with the trust com­pany and in­clude these in your will

Sankie Mo­rata

Chief op­er­a­tions of­fi­cer of San­lam Per­sonal Fi­nance: Fidu­ciary Ser­vices

these fees and in­clude this in your will. He says fees must be rea­son­able and there must be a bal­ance be­tween cost and value.

Mo­rata says that fees are de­ter­mined by the na­ture of the as­sets in the trust.

Where the trust com­pany is also a trustee, it may charge a trustee fee, an on­go­ing cost to the trust, Mo­rata says.

Costs are an im­por­tant con­sid­er­a­tion, espe­cially when they are based on as­sets in the trust. “Some peo­ple only be­come wealthy at death, when their life pol­icy pays out,” Mo­rata says.

“When you cre­ate an in­ter vivos trust, you trans­fer your as­sets into the trust and in do­ing so in­cur costs such as cap­i­tal gains tax and trans­fer duty if prop­erty is among your as­sets, which means you need cash at the time of set­ting up the trust.

“If you don’t have the cash it be­comes more prac­ti­cal to do it at death, when there’s enough liq­uid­ity in your es­tate to cover these costs,” Mo­rata says.

To put your as­sets into an in­ter vivos trust you need to do­nate your as­sets, in­cur­ring do­na­tions tax, or sell your as­sets to the trust.

To avoid do­na­tions tax, most peo­ple choose to sell their as­sets to the trust, but typ­i­cally the trust doesn’t pay you for these as­sets. In­stead, you open a loan ac­count and the trust owes you the money and must pay in­ter­est on the out­stand­ing bal­ance.

Each year you can do­nate R100 000 taxfree to the trust and in this way re­duce the loan. How­ever, if you are at an ad­vanced age, you could die be­fore the loan is re­paid, leav­ing you with an as­set in your es­tate that could at­tract es­tate duty.

As soon as you reg­is­ter an in­ter vivos trust, there will be com­pli­ance re­quire­ments to be met, for ex­am­ple, to reg­is­ter the trust as a tax­payer with SARS and lodge an­nual tax re­turns, Visser says.

“If you want to keep costs low, a tes­ta­men­tary trust may be less ex­pen­sive as it will only be set up af­ter your death and com­pli­ance re­quire­ments will have to be met there­after, but then you may miss out on es­tate-plan­ning op­por­tu­ni­ties dur­ing your life­time.”

Pic­ture: 123rf.com

Set­ting up a trust is not only for the wealthy. Ex­perts say a tes­ta­men­tary trust, which comes into ef­fect upon your death, makes sense for many.

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