Trusts as a Tool for Estate Planning

What is a Trust?

A trust is formed when assets are given to the trustees to administer on behalf and for the benefit of the beneficiaries of the trust. To effectively preserve and transfer wealth from one generation to the next, comprehensive estate planning is essential and a trust could be used as an effective tool to ensure that wealth is preserved for future generations.

Methods of Trust Creation

Testamentary Trust

Trusts can be created in Wills, the testamentary trust or trust mortis causa. Such a trust only becomes effective on the death of the testator. The will itself will specify that a trust must be set up upon that person’s death. Testamentary trusts are usually created to hold assets on behalf of minor children and other dependants who cannot look after their own affairs.

Assets that form part of an estate may be moved to the testamentary trust and sometimes include limited rights such as a usufruct (temporary right to use/benefit from trust assets).

Trustees are appointed to administer the trust in terms of the will until the trust terminates which is usually after a predetermined period or at a determined event such as the death of an income beneficiary or a minor turning eighteen (or whatever age the trust stipulates).

Inter Vivos Trust

An inter vivos trust or living trust, is created during the lifetime of the founder. Such a trust comes into being during the lifetime of the founder. A living trust is created by the drafting of a trust deed which sets out who the founder, trustees and beneficiaries are, defines powers and duties of trustees and how and when a trust is to be wound up. The trust becomes effective as soon as it is registered at the Master of the High Court.

Parties to a Trust

The Founder

Anyone who has the intention to create a trust can act as the founder of a trust. In the case of a testamentary trust, the testator is the founder of the trust.

Trustees

The trustees administer and control the trust’s assets on behalf of the beneficiaries.

Beneficiaries

Beneficiaries benefit from the trust assets. Beneficiaries can be either income or capital beneficiaries, and can have vested or discretionary rights.

What is Special About a Trust?

The special attributes of a trust which contributes to its popularity in the field of estate planning can be summarised as follows:

• A trust allows for the safe custody of assets for beneficiaries such as minors and persons who have to be protected against themselves and are ideally accommodated in a trust
• As trust property does not form part of the personal estate of the trustees or the beneficiary, trust property is outside the reach of personal creditors of these parties.
• If properly planned, managed and controlled, a trust can act as a significant shelter against future estate duties. Assets which belong to a trust are not subject to executors’ fees, which can be up to 3.5% on the gross value of an estate.
• A trust ensures continuity, and allows for financial security for loved ones in the event of death.