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Trust funds not just for super rich

Jun 01 2015 17:17

Johannesburg - While many people have heard about trust funds, not everyone knows that you don’t have to be a billionaire to set one up and ensure your money is spent wisely.

As a way of ensuring that your money is bequeathed to a loved one and can provide financial security either while you are alive or after you have passed on, a trust can be a useful estate planning tool.

A trust is an entity that is established where one or more people (called trustees) are “entrusted” with looking after and managing an asset (usually money) for the benefit of one or more people (called beneficiaries) for a certain period of time.

Andrew Auld, Alexander Forbes Financial Planning Consultants’ executive wealth manager, explained that there are two basic types of trusts.

A testamentary trust is only set up after a person’s death in accordance with the wishes laid out in their will, while an inter vivos trust is created during a person’s lifetime and sets out the details of the trust.

“Given that an inter vivos trust can cost about R7 500 to set up (depending on the complexity), it is better to use a testamentary trust in one’s will to specifically cater for the possibility of dying and leaving behind minor children.

The set up costs of an inter vivos trust can, therefore, be avoided if the trust proves to not be needed at death, for example if the children are over 18 by then. The latter is better if one is seeking to protect assets from creditors or to reduce estate duty, according to Auld.

Both trusts can be set up on either a discretionary or a vesting basis.

“A discretionary trust means the trustees have discretion to decide if they will distribute any income (interest, dividends, rental) each year, while a vesting trust means income derived from the trust assets must be allocated each year to the specified beneficiary,” explained Auld.

READ: Coetzee raves about trusts to protect wealth

For parents wondering if they should set up a trust fund for their children, Auld lists some of the benefits:

- By law, if a person under 18 years of age inherits money, it has to be deposited in the Guardians Fund. This restricts the investment options and flexibility that the testator might prefer and it is, therefore, advisable to make provision in one’s will for a trust to be set up if any of your children are under 18 at the time of your death.

- To protect assets from creditors as they can’t generally lay claim to a trust’s assets.

- To limit future estate duty liability.

If a trust fund grows from R200 000 to R1.2m over 15 years, the growth in the trust’s name could avoid the estate duty cost of 20% if at the founder’s death, the assets had been held in his name. This would amount to a R200 000 saving in death taxes.

- Income tax planning and the conduit principle means that if the trust earns income and distributes it all to the beneficiaries, then the trust itself will not incur any tax liability on the income it earned.

This tax liability passes to the beneficiary who received the taxable income.
 
Subject to certain tax law limitations, the trust can, therefore, operate like a funnel through which the taxable earnings flow. The trustees of a discretionary trust may, therefore, be able to channel taxable income to the children to reduce the overall family’s tax bill.

A trust company or attorney can assist in setting up a trust fund, which is then registered with the office of the Master of the High Court. The trust needs to be registered for tax purposes with SA Revenue Service (Sars) and a bank account must be opened.  

“Setting up and running a trust does cost money. The set-up cost could be around R7 500 and the annual fee could be a similar amount if an independent trustee is hired - which is advisable. Therefore, the benefit needs to outweigh these initial and annual costs," said Auld.

Trusts are not only for the super-rich, but the cost-benefit trade-off means that it can be too expensive to run for smaller capital amounts.

“In special cases (as opposed to estate duty savings alone) the founder may be prepared to incur the higher relative cost on smaller capital amounts to achieve his or her objective with the trust,” explained Auld.

For those considering establishing a trust, Auld recommended meeting with a certified financial planner who will take you through whether a trust is the right investment vehicle to protect your assets into the future.

ALSO READ: Taxes and trusts

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alexander forbes  |  money  |  law  |  trusts
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