LMV Attorneys Pretoria | Trust Formation & Administration

What is a Trust?

A trust is a legal arrangement in which a person (the founder or settlor) transfers property or assets to another person or persons (the trustees) to hold and manage for the benefit of others (the beneficiaries). The trust itself is not a legal person but a relationship governed by the trust deed and applicable law.

Key elements include:

Founder – creates the trust and provides the initial property.
Trustees – hold and administer the trust assets, with a fiduciary duty to act in the best interests of the beneficiaries.
Beneficiaries – those who benefit from the trust, either through income or capital.
Trust property – assets owned by the trust, separate from the personal estates of the founder and trustees.

The essence of a trust lies in separating control and enjoyment of property: trustees control and manage it, while beneficiaries enjoy its benefits. This separation is what distinguishes a trust from other legal arrangements .

Advantages of having a trust

Estate planning tool – assets in a trust are not part of an individual’s personal estate, which can help reduce estate duty.
Asset protection – trust property is generally protected from creditors of the founder, trustees, or beneficiaries (subject to certain conditions).
Continuity – a trust can continue indefinitely, ensuring assets are managed beyond the founder’s death.
Flexibility in distributions – income and capital can be distributed to beneficiaries in a tax-efficient and needs-based manner.
Confidentiality – trust affairs are not generally a matter of public record (unlike a will lodged with the Master of the High Court).
Succession planning – allows smooth transition of asset management without delays associated with deceased estates.
Potential tax planning opportunities – income can be allocated among beneficiaries to take advantage of lower marginal tax rates

Disadvantages of a trust

Loss of personal control – once assets are transferred to the trust, the founder no longer personally owns or controls them.
Ongoing compliance obligations – trustees must comply with the Trust Property Control Act and other laws, including proper record-keeping and reporting to the Master.
Costs – professional trustee fees, accounting fees, and compliance costs can be significant.
Potential tax disadvantages – trusts have high flat income tax rates if income is retained in the trust rather than distributed.
Risk of mismanagement – if trustees do not act diligently or in good faith, trust assets can be misused or diminished.
Loss of flexibility – changes to the trust deed or structure can be complex and may require court approval.
Scrutiny by SARS and creditors – improper use of a trust can lead to it being attacked or “pierced” by courts or tax authorities

Main Types of trusts

Inter vivos trusts – created during the founder’s lifetime, usually through a trust deed.
Testamentary trusts – created in terms of a will and come into effect after the founder’s death.
Discretionary trusts – trustees have discretion as to how and when to distribute income or capital to beneficiaries.
Vested (or fixed) trusts – beneficiaries have fixed rights to income or capital, as set out in the trust deed.
Special trusts – created for specific purposes, such as:
- Special Trust Type A – for the benefit of a person with a disability.
- Special Trust Type B – testamentary trusts created solely for relatives under 18 years of age