Category Life Insurance

Gone are the days when Trusts were considered useful to wealthy people with a ‘tax problem’

27 July 2022 FNB
Matlhodi Leteane, Head of Client Experience at FNB Fiduciary

Matlhodi Leteane, Head of Client Experience at FNB Fiduciary

There was a time when Trusts were considered to only be useful to very wealthy people with a ‘tax problem’. However, that’s certainly not the case. A Trust can be very useful to anyone who wants an effective way of managing and protecting their long-term assets like property and investments.

According to Matlhodi Leteane, Head of Client Experience at FNB Fiduciary, the unique characteristics of a Trust make it a very useful part of any person’s Estate Plan, but it’s important to understand how a Trust works and what costs and risks are involved in using one.

“A living or Inter Vivos Trust can be created by any individual,” Leteane explains, “and it offers an effective way of managing and protecting the value of their assets, usually for the benefit of future generations.”

According to Leteane, there are typically three main reasons why people consider establishing Trusts– but reducing tax liability is not the only motivator.

She explains that most founders of Trusts are looking for a proven way of reducing the estate duties that their beneficiaries will have to pay to inherit their properties and other assets when they pass away. “When any person dies, the process of passing their assets on to their beneficiaries triggers estate duty,” she explains, “but a Trust can never die, so it is not liable for estate duty, transfer duty, executor’s fees, or conveyancing fees, that would otherwise have to be paid if those assets were held in the deceased individual’s own name.”

And it’s not just in death that the value of holding assets in a Trust becomes evident. Trusts, when set up for the right reasons and in the correct way, offers many benefits to individuals who could benefit from and use assets without physically owning them. This benefit is especially useful in providing protections of assets against potential creditors. “Because the assets held in a Trust are not in your name, claims against a personal estate will not include trust owned assets.”

She points out that these characteristics of a Trust make it a highly useful mechanism for building a legacy and creating wealth for your children. “By protecting your growth assets in a Trust, you ensure that there is no risk that their value can get eroded over time,” she says, “and because you can specify who the beneficiaries of the Trust are, you can also ensure that that value is only ever transferred to those you want to receive it.”

FNB Global Solutions Specialist, Willem van der Merwe, highlights that “similar to the benefits achieved by a domestic or South African Trust, some clients might also consider making use of an offshore Trust to hold assets as part of their estate planning. The need for an offshore Trust is primarily due to the fact that South African individuals have the flexibility to externalise funds from South Africa on an annual basis but are typically not able to hold such assets in a South African Trust or company. Where such assets need protection, an offshore Trust can be considered. The Trustees of the offshore Trust can, on the same principles than the domestic Trusts, protect and administer such assets for the benefit of the beneficiaries. Ultimately, a Trust is a flexible estate planning vehicle used to protect the assets and streamline the succession of the assets for future generations.”

However, Leteane states that, while Trusts make for excellent generational wealth creation vehicles, there are some factors you need to consider before you choose one that best suits your estate planning or legacy creation needs. The most significant of these is the cost involved. In addition to the fees and charges involved in setting up the Trust, when it comes to taxation, it is important that trustees carefully consider the tax implications of dealing with the income derived from trust assets and that the pros and cons are considered when dealing with payments to beneficiaries.

And Leteane further adds that with a Trust being a legal entity, there are governance requirements that must compiled with, such as producing annual financial statements and file an annual income tax return as well as bi-annual provisional tax returns. “Trusts in this sense, come with additional administrative requirements, but the long-term benefits of setting up Trusts to house the financial legacy of the family and future generations, will outweigh the administrative requirements,” she points out.

But despite these additional costs, Leteane says that a Trust is still one of the most effective ways of protecting the value of your growth assets. “For most people, the value of a Trust far outweighs the additional costs and tax liabilities,” she points out, “and provided you work with a trusted fiduciary partner who can clearly explain how your Trust works and help you structure it to maximise its value, a living Trust remains one of the most effective ways of leaving a legacy for those you care about.”

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