BACK TO BASICS: 3 TYPES OF TRUSTS IN SOUTH AFRICA

by Nandi Sauer


In this article we discuss the 3 valid trusts in South Africa, and which one we prefer, and why.

As mentioned in previous Times Newsletters, a trust is a valuable tool for estate and tax planning. A well-planned trust can protect your assets and preserve your wealth for generations to come. The advantages of a trust is something we learn about on a regular basis, however, in some households, the concept of a trust is still an uncertainty.  The reason for this is that even though the advantages of a trust are something people know, they don't always know the basics behind a trust.

A trust is a contract on behalf of a third party. The founder of a trust enters into a contract with the trustees of the trust to the benefit of the beneficiaries. In this contract, the founder provides an original donation (for example R100) to the trustees to administer the donation on behalf of the trust to the benefit of the beneficiaries. The founder gives all his rights to this donation over to the trustees of the trust. This contract is regulated by the Trust Property Control Act 57 of 1998.

South African Law recognises three types of trusts, known as an Ownership Trust, a Bewind Trust, and a Curatorship Trust.

An Ownership Trust is a trust created by the founder who transfers ownership of assets or property to trustees to be held for the benefit of defined or determinable beneficiaries of the Trust. This Trust is also known as an 'Ordinary Trust' and is the most common trust in South Africa. This is also the only Trust we suggest to our members. The key elements to identify this trust are the trustees who are the actual owners of the trust assets, and the rights of the beneficiaries in respect of the trust assets are usually determined by the trust deed.

A Bewind Trust is a trust where the founder makes a bequest to the beneficiaries and vests the administration of the assets in the trustees. The key elements to identify a Bewind trust is the beneficiaries are the actual owners of the trust assets and the trustees only have administrative control of assets which they manage for the benefit of the beneficiaries. The tax and risk implications that a vested right in a trust can have is the reason why we do not recommend this type of trust.

Curatorship Trusts is based on the same structure to a Bewind trust, except the key elements here is that the assets are administered on behalf of a beneficiary who does not have the capacity to manage his or her own affairs. This type of trust is a specialist field on its own. 

South Africa further describes trust according to when they were created. Inter Vivos (Living) Trusts are created during the founder's lifetime, where a Testamentary (Mortis Causa) Trust is set up in terms of the will of a person and will only be registered after his or her death.

There are various kinds of Inter Vivos Trusts that can be set up, depending on their purpose, for example, a Family Business Trust, a Business Trust, Charity Trust, and Investment Trust. Testamentary Trusts are mostly geared towards protecting the interest of minors and other dependants who cannot look after their own assets.

Because Inter Vivos Trusts are more flexible and can be amended easier than testamentary trusts, we believe it is the better option for our clients.

The Inter Vivos and Mortis Causa Trusts can further be described according to the rights given to beneficiaries and can either be a Discretionary Trust or a Vested Trust.

A Discretionary Trust is a trust where the trustees are given discretionary powers as to how and when to allocate the income or capital of the trust to the beneficiaries. The beneficiaries do not have the right to receive any benefits from the trust, they only have a 'hope' to receive something. Because the beneficiaries have no rights whatsoever, in the event of a beneficiary dying or in the event of a beneficiary going insolvent, nothing can be held in his or her estate or pass to his or her heirs or creditors. This is also the reason why we make use of this specific type of trust.

A Vested Trust is a trust where the trustees are not given any discretion in the deed, and the beneficiaries and their benefit(s) are fixed and predetermined. The beneficiaries have vested rights to the income and capital, which cannot be contested by anyone else. In the event of the death of one of these beneficiaries prior to payment, the deceased beneficiary's vested rights are transmissible to his or her heirs, and these rights must be included in his or her estate for estate duty purposes.

Taking the above into consideration, it is important to ensure that your trust is a trust recognised by South African Law and the most suitable trust for your needs. It is important to separate your high risk assets from your low risk assets by using these different types of trusts.

To be put in touch with a Trust Administrator, please contact services@wealthmastersclub.com




 
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