Using a trust to protect your wealth for generations
By Gerhardt Meyer, CFP®, Head of Technical Support, PSG Wealth
A trust can be an effective vehicle for the preservation of wealth, allowing succeeding generations to participate in, and benefit from, the wealth created by prior generations. It’s important to understand the benefits and what to consider in setting up a trust, and careful consideration should also be given to the selection of trustees.
For years, families have been using trusts to preserve and manage their wealth for the benefit of their heirs. Trusts provide a means of protecting their assets and controlling how these are used. The flexibility of trust instruments makes them uniquely useful for estate and succession planning. Although many of the tax benefits traditionally associated with trusts have been eroded in recent years by anti-avoidance legislation, trusts still offer many advantages.
Why should I set up a trust?
A trust is ideal for estate ‘pegging’ or freezing asset values, and people often establish an inter vivos (living) trust for estate planning purposes. What this means is that once an asset is moved into the trust, either through a loan account or a donation, any future growth of the asset will take place in the trust. So, the value of the donor’s estate on their death is significantly less than if the growth had taken place in their estate, thus limiting estate duty liability.
A trust also protects the interests of the surviving spouse and minor children and can even continue for future generations, as assets can’t be frozen when the founder of the trust dies. Trust assets are also protected from creditors if the founder was solvent at the time of placing the assets into the trust.
How do I set up a trust?
A trust can either be created during your lifetime or on death in terms of your will. Family trusts are inter vivos (living) trusts that are created during the founder’s lifetime. It is established by a trust deed, which sets out who the founder, trustees and beneficiaries are, and defines powers and duties of trustees. Testamentary trusts are created by a trust clause in a will, in which the testator bequeaths assets to the trust and stipulates the terms and conditions that will apply to the trust. A testamentary trust only comes into existence upon the death of the testator. Testamentary trusts are typically geared towards protecting the interests of minors and other dependants who cannot look after their own affairs.
Should the need for a family trust be established in your estate plan, careful consideration should be given when deciding what assets to transfer to the trust. The general rule is to focus on assets with the highest growth potential. Trusts generally have a long-term time horizon and speculative assets that you intend to sell should not be transferred to a trust, as the inclusion rate of capital gains tax for trusts is much higher than that for individuals and there is no primary residence exclusion either. Risky business interests should also be separated from your trust, to protect the trust assets.
If assets are transferred by way of donation, donations tax will be payable. When transferring assets by creating a loan account, it is important that the official interest rate on loans be charged, as interest-free loans will attract donations tax on interest foregone below the official interest rate.
How do I select my trustees?
Careful consideration should be given when appointing trustees, as they will make all the decisions and manage the trust’s assets. They have a fiduciary duty to look after the assets of the trust and will be required to exercise care and objectivity when performing their functions.
Many people who agree to take on the role of trustee are not fully aware of their duties and obligations, nor the extent to which they can be personally held liable. From a governance perspective, it is always advisable to appoint an odd number of trustees to administer your trust, with three being the optimal number. Bear in mind that having too many trustees can be highly impractical, especially when it comes to obtaining signatures, co-ordinating meetings and making decisions.
Although not a legal requirement for all trusts, appointing an external trustee has become common practice to ensure a degree of objectivity in the management of trust assets. A recent directive issued by the Master of the High Court requires trusts with the power to contract with third parties, or those where all beneficiaries are related, to appoint an external trustee. It is not a requirement that a professional person be appointed as an external trustee. It does, however, make sense to appoint someone in this role who specialises in fiduciary services or who has a sound understanding of trusts and the legislation pertaining to them. A qualified financial planner can assist you in this process and provide you with peace of mind, knowing that your wealth will be protected for generations to come.