Trusts / Wills & Estates

The use of Trusts as a safe haven for assets

By 07/07/2011 July 20th, 2013 No Comments

It is an open question, whether South African Law relative to trusts developed or had its origins in Roman Law or in English Law. The Romans certainly knew about trusts, and the formation of a practice in particular types of trusts developed in England round about the time of the Crusades. There was extensive English Law influence in South Africa in the early 19th century and the terms “trust” and “trustee” began to be accepted in South Africa.

It can be said, though, that the South African Law of Trusts is a mixture of Roman-Dutch Law, English Law and indigenous South African Law.

 Our Trust Property Control Act no 57/1988 governs the legislative framework for trusts. There are two types of trust, the inter-vivos trust and a testamentary trust: the testamentary trust follows the death of a person and commences once the estate has been wound up, and the inter-vivos trust is formed while the founder of the trust is still alive. Both types of trust can be used as a safe haven for assets.

 Trusts basically consist of the founder of the trust – who provides the initial capital and money for the trusts, trustees who effectively run the trust, and beneficiaries who receive benefits from the trust.

 A trust once formed and registered with the Master of the High Court has many advantages. It can be used to house assets for those under a mental or physical disability, for example, where a severely injured person recovers substantial damages from the Road Accident Fund, and is unable to look after that amount himself, a trust would be the apposite vehicle. This trust would administer the funds received on his behalf, paying his maintenance, medical and living expenses and caring for him until death.

 Trusts can be used to create safe havens for assets of individuals. They have the effect of separating assets from the personal ownership of the individual to ownership by the trust thus providing protection from creditors of that individual. Trusts can also form an integral part of an estate plan, by limiting the growth of assets in the estate of the planner thus reducing the estate duty payable.

 A simple example will serve to illustrate the point.

 A businessman buys a building in the name of an inter-vivos family trust. The building is worth R 3 500 000 – the current estate duty threshold. The trust now owes him R 3 500 000 for the building which is an asset in the trust. When he dies, forty years later, the building is now worth R 25 000 000. As he has properly planned his estate, the liability for estate duty is as follows:

Amount in the estate: R 3 500 000 (being the amount the trust owes him for the building)

Less rebate R 3 500 000

 Estate duty payable is thus R 0.00

 If he had purchased the building in his name individually, the estate duty payable would have been in the region of R 4 300 000. (R 25 000 000 minus the rebate of R 3 500 000 – R 21 500 000. 20{bb7c59228909ee3c635bb54164678f79c6c2320af74994b444cd69be7e87e9c7} of R 21 500 000 amounts to R 4 300 000.)

 The asset – the building – is also in a safe haven, as any action against him as an individual will not allow execution against the building, which is effectively owned by the trust. Neither can his curator of his insolvent estate attach the building which is in fact owned by the trust.

 Thus, in the above example, two objectives are achieved by the trust – a protection of assets from the creditors of the business man – and also the substantial reduction of the estate duty payable on his estate.

 In regard to the safe haven aspect this protection offered by a trust could extend until after the death of the planner. Where a farm, for example, forms part of a deceased estate, and the will of the testator provides that each of three children may inherit the farm in equal shares, the executor of the estate might not be able to divide the farmland and distribute the one third share to the children. This is in terms of the Subdivision of Agricultural Land Act which restricts this division of agricultural land. If the farm was already in a trust or bequeathed to a testamentary trust on the death of the testator, the farm would be preserved in the trust and would be of lasting benefit to the heirs and beneficiaries. The asset would not have to be sold. The farm asset will be protected in the trust and the children will have the benefit of this asset being protected by the trust against their creditors.

 If a trust is set up and continues to provide income for heirs and descendants those assets would be protected against the heirs themselves. If such heirs were wayward and prodigals, instead of bequeathing assets to descendants, the testator could bequeath them to a trust. This would mean that the assets are safe and would not be dissipated by those wayward heirs but preserved in the trust for future generations.

 Trusts have many uses, but this protection of assets in the safe haven of a trust is a very useful tool in financial and estate planning and it matters not whether the estate is very large, and the net worth of the assets is immense or whether the assets are low in value. Particular assets such as long term investments like shares, immovable property, i.e. assets which offer growth, are often best placed in a trust.

7th July 2011

Ian Mc Laren

Ian Mc Laren

Ian McLaren BA LLB (WITS) General Educated St Johns College, Houghton. BA LLB University of the Witwatersrand 1984 Founded McLarens Attorneys September 1986. Right of Appearance High Court, October 1996. Expertise Litigation, Labour Law, Commercial Law, Family Law, Pension and Provident Funds, Customs and Excise, Wills, Deceased Estates, Trusts, Commercial Agreements, Reviewing and Drafting Government Legislation, Information Technology. Committees/ Trusts Law Society of South Africa Information Technology Committee. Trustee Verney College Educational Trust Other Transvaal Provincial colours for Practical Shooting. Third degree Black Belt JKS Karate. Photographer and motor cyclist Lectured for Continuing Legal Education on Information Technology issues.