Do the benefits of a trust justify the costs?
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ALL ABOUT TRUSTS:
By Phia van der Spuy
People often ask whether the benefits of a trust justify its start-up and running costs.
Trusts do cost money to set up, but using the cost of setting up a trust as an excuse not to set one up may be a case of “penny wise and pound foolish”. Not having a trust may cost you more.
Income tax, capital gains tax (CGT), estate duty and executor’s fees, during your life and on your death, can be expensive if you do not set up a trust timeously.
It can be a costly exercise to move assets, acquired by you, into a trust at a later stage, so the perfect time to establish a trust, as part of your estate plan, is when you start building wealth, in order to avoid unnecessary costs – now or in future.
Establishing a trust generates additional administration costs and complexity in your affairs. It is important to demonstrate the active management of the trust as a separate entity from yourself.
The costs of setting up a trust typically include legal fees for drafting the trust deed and for registering the trust. You can pay as little as R2 000, or as much as R20 000 to have a trust registered. The fee to register a trust with the Master of the High Court is R250.
Although paying a lot of money does not always guarantee quality, you should avoid bargain hunting, as the trust deed may be one of the most important contracts you draw up in your lifetime.
You should seek the services of a professional who specialises in trusts, and the trust deed should be tailored to your specific needs and requirements. Do not accept a cheap, vanilla “copy-and-paste” trust deed. This may cost you a lot later and prevent you from achieving your estate-planning objectives.
Ongoing costs will be incurred during the existence of the trust and may include:
- Costs to employ the services of a trust administrator. Trust service providers typically either charge a fixed amount a month or fees based on a percentage of assets. Be mindful of the amount that may be payable if valuable assets are held in the trust. The fee charged may become excessive if one applies a percentage of assets.
- Costs to maintain a separate bank account for all the trust’s affairs.
- Costs to have annual financial statements prepared. A trust does not require an audit, unless the Master of the High Court or the beneficiaries request it, or if the trust instrument stipulates that it must be audited.
- Costs to prepare and submit tax returns. The SA Revenue Service (Sars) views a trust as a separate person for which separate income tax returns and provisional income tax returns are required to be submitted.
- Costs to employ the services of an independent trustee. It is now a requirement of the Master of the High Court to appoint an independent trustee for every new family business trust. Independent trustees usually charge a monthly fee for this service – normally between R500 and R2 000 a month. If the trustee performs trust administration services, a combined fee is normally charged.
Be mindful if the trust administrator, who may also be the sole trustee, acts in a way to maximise the trustee fee (particularly if charged on a percentage of assets basis), rather than acting in the best interests of the beneficiaries.
It is important to demonstrate that the trust is managed as a separate entity to the founder and its beneficiaries.
If there are no resolutions, minutes of meetings, or a separate bank account, Sars and creditors, including a soon-to-be-ex-spouse, may request that the court declares the trust your alter ego (an extension of yourself), resulting in the disregard of the trust. This “cost” may be significantly higher than the effort required to administer the trust.
It is important that you weigh up whether the costs of establishing and managing a trust exceed any savings in terms of death costs, such as estate duty, CGT and executor’s fees, which could be in excess of 30% of an estate. The purpose of setting up a trust may, however, be the determining factor in terms of whether or not you register a trust.
It is not simply about the tax savings, which should not be the main motivation for setting up a trust in the first place.
If a trust is set up to protect your assets, the benefits of a trust may far outweigh the costs of setting up and maintaining the trust. If you are sequestrated, you will lose all of your assets. Setting up and maintaining a trust may be a small price to pay compared with losing all your assets in the event of your sequestration.
Phia van der Spuy is a Master Tax Practitioner, a Trust and Estate Practitioner and the founder of Trusteeze, a professional trust practitioner.