A Fin24 user writes:
I need advice on how to start a trust fund/investment. To provide a clearer picture I'll provide some background details.
I'm a guy in my mid-twenties, single, never married and child-free (childless sounds so negative).
I have one sibling, an older sister. She is married and has two children, ages six and one.
This year as a Christmas present to my sister, her husband and children I want to start an investment of which the children are to be the beneficiaries, specifically as a means to fund tertiary education.
If after the cost of tertiary education has been covered and funds remain, I would like to specify that the children receive the remaining funds at the age of 25.
Assuming my sister and her husband consent:
• What potential legal hurdles do I face?
• What are the tax implications?
• What would happen to such an investment if I were to die before the planned payout period?
• Brokers and lawyers can be vast sinkholes into which money disappears - can I accomplish all/most of this without needing to pay third-party professionals?
• Lastly, any hints or advice on things to watch out for?
Thanks and regards
The Child-Free Uncle :) Sore Cloete, legal manager at Old Mutual, answers:
In answering your question, the point of departure would be to consider the possible protection of funds for your niece(s)/nephew(s) and in this regard a trust may be viewed as the best possible vehicle.
Various additional considerations need to be taken into account in answering your questions and factors like tax, costs and affordability will also be important. The important considerations will be touched on in the answer.Trust
A trust is usually the best way to protect funds for minors, and to ensure that the money is used for the purpose it is intended for.
There are two types of trusts, namely a trust created by a will, which is known as a testamentary trust, and a trust created by a contract in the form of a trust deed, which is known as an inter vivos trust.
A testamentary trust comes into existence after the death of the creator as it is created in his/her will, while an inter vivos trust is set up while the creator is still alive.
Assets are transferred to a trust by the creator for the benefit of beneficiaries, who would be your niece(s)/nephew(s).
The management and administration of the trust assets are the responsibility of the trustees of the trust, who have to be appointed by the master of the high court.
Careful consideration should be given to the people nominated as trustees as they will control the trust assets.
A trust may be the solution to your question of what would happen to the investment if you were to die: a trust created prior to your passing away will not terminate upon your death, while a trust created in your will comes into operation upon your death and could be in existence until for example your niece/nephew’s 25th birthday.
The trust may also be created for the specific purpose of paying for the education of the beneficiaries (your niece(s)/nephew(s) in this case) and prevents their guardians from having control over funds for their benefit.Tax implications
The important tax considerations when transferring funds to another person or entity like a trust are the donations tax, income tax and capital gains tax implications.
• South Africans may donate a total of R100 000 per annum to a third party (who is not his/her spouse) without paying donations tax. Donations tax is levied at 20% of the amount above R100 000.
For example, if R120 000 is donated in a particular year only R20 000 will attract donations tax of 20%. A donation of up to R100 000 may therefore be made to a trust each year without attracting donations tax.
• The income tax and capital gains tax payable on the trust assets may be payable by the trust, the creator of the trust, the beneficiary or parent of the beneficiary, depending on the circumstances.
How the donation is made to the trust and how the trust is structured will determine who will be responsible for the income tax and capital gains tax.
Careful consideration should be given here as many factors have to be taken into account in determining the income tax and capital gains tax liabilities.Costs
When considering a trust, whether testamentary or inter vivos, these costs should be taken into account:
• The drawing of up the trust deed for an inter vivos trust;
• The trustee’s acceptance fee;
• The annual trust administration fees; and
• The distribution feesInvestments
Various vehicles may be considered for education investments. Popular options are unit trusts, endowment policies and sinking fund policies.
Factors like the affordability, term, risk, liquidity and tax implications of the various investment vehicles will determine what investment would be best suited for your need. Such an investment could possibly be structured in one of the following ways:
- The investment is made in your own name, where you have control until your death. Upon your death, a testamentary trust is created and such investment or the proceeds from itis bequeathed to the testamentary trust.
You would have control of the investment until your death and would be able to change your mind; or
- An inter vivos trust is created and you donate funds to such trust. The trust invests the trust funds in an appropriate investment vehicle and you would have no control over the investment, as the trustees determine the investment vehicle.
In this regard the donations tax, income tax and capital gains tax implications should be considered; or
- Investments could be made in the names of your niece(s)/nephew(s) and their parents would have the control of such investments as they are still minors.
The donations tax, income tax and capital gains tax implications also play a role in this consideration.
The answers above are based on the information you provided; to ensure that your particular need is addressed correctly, the advice of a licensed financial adviser or broker should be obtained as the above answer is only a guideline.
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