While many people have heard about trust funds, not everyone knows that you don’t have to be a billionaire to set up one 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.
Alexander Forbes financial planning consultants’ executive wealth manager, Andrew Auld, shares the benefits of trust funds:
- By law, if a person under 18 years of age inherits money, it has to be deposited in the Guardian’s Fund. This restricts the investment options and flexibility that the testator might prefer, so it is thus 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 R1.2 million over 15 years, the growth in the trust’s name could avoid the estate duty cost of 20% upon the founder’s death if 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 – this principle means that if the trust earns income and distributes it all to the beneficiaries, then it 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 thus operate like a funnel through which the taxable earnings flow. The trustees of a discretionary trust may thus 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 with SARS for tax purposes and a bank account 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. Thus, the benefit needs to outweigh these initial and annual costs.
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 their objectives with the trust.”
For those considering establishing a trust, Auld recommends meeting with a certified financial planner who will take you through the pros and cons.
