Family Estate Planning | Family Trusts

Estate planning is vital to managing family finances and every family needs to consider the options available to them in terms of the legal vehicles which may be used to house their funds. Family trusts, otherwise known as inter vivos trusts, are a category of trusts often used to assist individuals and families in estate planning. Family trusts are useful vehicles as they provide a variety of legal and tax advantages to family assets.

When family estate planning is at the forefront of your mind, it is difficult to justify any additional risk which would create negative consequences for you and your family. Making use of a family trust is pertinent when one is entering into personal agreements which attract personal liability. A person’s business decisions can negatively impact their family if there is no separation between the individual’s and the family’s assets. E.g, where an entrepreneur’s business fails, creditors may seek to take their personal assets which will affect the rest of their family unit. Family trusts are often used in estate planning as they allow for the separation of assets from the liability of individual family members. It is important to note, however, that the administration of family trusts must be handled with care and that there are some unfavourable tax consequences relating to certain transactions made by trusts. If you are considering registering a trust, make sure to take full legal advice to ensure its suitability for you.

The following considerations are applicable when deciding to use a family trust:

• Protection of assets

• • Ownership of trust assets vests in the trust and therefore individual liability and risk exposure are decreased – the assets are not owned by individuals and as such cannot be used in creditor claims.

• • The trust structure protects assets from sale by a beneficiary, attachment in sequestration or liquidation and similar external influences.

• • With the family trust owning major family assets, there is greater flexibility surrounding the bequeathment of those assets to heirs – as those assets will not fall into the estate of individual family members and so will not require to be distributed through the Master’s Office.

• Tax consequences

• • Property and other assets that are transferred to a trust do not attract the same tax status as those transferred to individuals and are taxed at different rates. As with individuals, an inter vivos trust is subject to both capital gains and income tax.

• • Trusts (excluding special trusts set up for the benefit of a disabled person) are ordinarily taxed at a flat rate of 45% on their income. This is quite high, but if trusts distribute their income to beneficiaries in the same financial year then that income is taxed in the hands of the beneficiary, usually at a much lower rate based on the individual’s sliding scale.  See s25B of the Income Tax Act for the relevant provisions.

• • For example, if a trust earns R100 000 income in a financial year, it must take care to distribute this to its beneficiaries timeously so that the overall tax is less.

• • This is useful when distributing income earned on shared assets. E.g, if a trust owns a property and received rental income of R100 000 for a year, it then distributes this to 10 beneficiaries, then each beneficiary will be taxed on R10 000 at their marginal rates. Had this property been owned by a family member individually, they would have been taxed on the full R100 000 (in a higher tax bracket) – even though they may have used this income to support other family members.

• • Capital gains will be similarly taxed in the hands of the trust unless the gains are distributed to beneficiaries prior to the financial year end. If these gains are not distributed, then a tax rate of 36% will be applied. Note that capital gains tax inclusion rate applied to inter vivos trusts is 80%, double the rate applied to individuals.

• Control of the trust

• • The life of the trust may exceed your own and can provide better long-term security to your family and the trust beneficiaries. Having a registered trust creates the possibility to extend your familial support after your passing.

• • Trusts are governed by the Trust Property Control Act, which provides for the establishment of trusts via a trust deed. Having a trust deed registered in the Masters Office provides a further layer of protection as it ensures that the administration of that trust is performed in accordance with the trust deed. Trustees, being those people responsible for administration of the trust, will be held accountable and their conduct is governed by the trust deed.

• • Trusts should be strictly administered to ensure trust assets and distributions are accounted for and that proper separation between the trust and individual beneficiaries’ estates is maintained.
• • It is important to establish appropriate measures for the accountability of trustees in the trust deed, consult a legal professional for assistance in this regard.

Although there are certain administrative expenses that come with the creation of trusts, the benefits associated with a well-run family trust can be significant when it comes to estate planning.

Contact us today if you require advice on inter vivos trusts and estate planning.