Trusts are an alternative to wills as a means of distributing a person’s assets. A person who places his or her assets in a trust is known as a settlor. Trust planning is vital, because trusts are more complex legally than wills, and settlors can lose control of their assets.
Trusts need to be set up after careful trust planning to ensure that the settlor’s wishes are followed. The settlor is essentially signing away his or her assets, sometimes with immediate effect. When those assets involve the family home, there is often a clause giving the settlor right of permanent residency until death. It takes legal expertise to conduct proper trust planning.
Some people decide to undertake trust planning so that the manner in which they dispose of their assets will not become a matter of public record. When an estate is passed on via a will, the will must be presented to a probate court and approved by a judge before it becomes legally binding.
Like most courts, probate courts are open to the public, including the media. Furthermore, documents lodged, including the will itself, are available for scrutiny once probate has been granted. That means the general public can find out exactly to whom any testator (will maker) left his or her estate, and how much, or what assets, each beneficiary received.
Using trust planning, a person could distribute his or her estate in exactly the same way, but without the details of the distribution being made public. With trust planning, a person could use a will to leave his or her estate to a trust, and that would be a matter for probate. However, the probate record would only show the transfer of assets from the testator’s estate to the trust. How the trust distributes the estate between the eventual beneficiaries would remain private.
Should I Set up a Trust to Avoid Inheritance Tax?
Inheritance in South Africa is not considered capital gain, and is therefore not taxable. Even so, there may be situations when trust planning provides tax benefits. However, it has to be borne in mind that most trusts are set up to deal with an event (the death of the settlor) that will occur a long time in the future.
Nobody can know for certain what tax laws will apply at the time of the distribution of assets to final beneficiaries, making such trust planning difficult. There is an inherent risk that projected tax savings may not occur. Secondly, tax authorities always try to close off what are seen as loopholes in laws, rules and regulations governing taxes.
If you think a trust might be the best way for you or a family member to arrange distribution of assets, you should speak to an expert in wills and trusts. An experienced professional will be able to advise you of the pros and cons.