What is a trust?
A trust is a fiduciary arrangement in which the trustor allows the trustee or trustees to hold property or/and assets on behalf of the beneficiary or beneficiaries.
Terms related to a trust
Fiduciary
A fiduciary is a person or legal entity, such as an authorised financial provider, who acts in good faith, ethically, and with honesty on behalf of another person or persons.
Trustor
A trustor, also referred to as founder or donor, refers to the person who creates (sets up) a trust. Trustors can be an individual, an entity, or married couples.
The responsibilities of a trustor are, amongst others:
- Decide what assets will be transferred to the trust.
- Designates beneficiaries and how they will benefit from the assets allocated to the trust.
- Selects the trustee or trustees who will manage the trust.
A trustor is also called a grantor or settlor.
Trustee
A trustee is a person or legal entity appointed by the trustor to manage and administer a trust. A trustee has a legal duty, referred to as a fiduciary responsibility, required to act in the best interest of the trust and the beneficiaries.
Beneficiary
A beneficiary refers to the person (persons) or legal entity who is entitled to benefit from the trust arrangement.
Trust instrument
The trust instrument is the document that is required to formally set up a trust.
Regarding an inter vivos trust, a trust deed is a document that sets up the trust.
Concerning a testamentary trust, the will of a deceased person serves as the trust document.
A trust document describes the distinction between the right to control the assets of the trust and the right to benefit from the assets.
Furthermore, the trust document:
- sets out the objectives of the trust,
- provides the names of the beneficiaries in a clear manner, leaving no doubt about their identities,
- stipulates the rights and obligations of the trustees, and
- the rules concerning the distribution of capital and income.
Types of trusts in the South African context
In South Africa, there are a number of ways in which a trust can be set up. The types of trusts are:
Inter Vivos Trust
An inter vivos trust also referred to as a living trust, is a trust that is created during the lifetime of the trustor for the purpose of estate planning and protection of assets and wealth of a family.
The trust can be utilised to hold certain investments and other assets for the benefit of the beneficiaries of the trust.
This type of trust is referred to as a discretionary trust, meaning a trustee is allowed absolute discretion to manage and administer the trust assets and income for the benefit of the beneficiaries in terms of a trust deed.
An inter vivos non-discretionary trust is a rare type of an inter vivos trust in which a trustee does not have absolute discretion.
The duration of an inter vivos trust depends on the stipulations in the trust deed. For example, the trust can expire at the end of a given period of time, or upon an event.
An inter vivos trust is commonly called a family trust.
Testamentary Trust
A testamentary trust, commonly known as a will trust, is set up in terms of the will of a deceased person.
Typically, the goal of a testamentary trust is to care for beneficiaries who are too young to inherit bequests directly or to provide protection for beneficiaries who need some degree of control.
A testamentary trust is often a special trust and does not come into existence until the death of the testator.
This type of trust can also be discretionary or non-discretionary.
Special Trust
A special trust is defined by the South African Income Tax Act (Act 58 of 1962) as: ‘… a trust solely for the benefit of one or more persons who is or are persons with a disability as defined in section 6B(1) [of the Income Tax Act] where such disability incapacitates such person or persons from earning a sufficient income for their maintenance, or from managing their own financial affairs.‘ (Accentuations by the article writer.)
An inter vivos trust or a testamentary trust can be a special trust, which can be a discretionary or non-discretionary trust.
Bewind Trust
A bewind trust is a trust set up in a founder’s lifetime and are created for business or trading purposes.
It is a trust in which the assets vest in the beneficiaries, while the trustees control the assets on behalf of the beneficiaries until the assets are eventually transferred to the beneficiaries.
A disadvantage of a bewind trust is that the assets in the trust can be attacked and recovered by creditors.
Business trust
A business trust, also known as a trading trust, is an inter vivos trust to conduct business and generate income.
A business trust enables the trustees to use the assets of the trust to do business and generate profits for the benefit of the beneficiaries.
The assets housed in a business trust are protected from creditors.
Contrary to companies and close corporations which are taxed at 28%, business trusts are taxed at 45% by SARS (the South African Revenue Service).
Registration of trusts
Trusts are registered through the various provincial jurisdictions of the office of the Master of the High Court in South Africa.
The Trust Property Control Act (Act 57 of 1958) regulates the registration of trusts, which requires the following documents for trust registrations:
- The original Trust Deed.
- Original Letters of Acceptance of Trust as Trustees by the trustees to be appointed.
- A letter from an accounting officer, agreeing to accept the appointment as accounting officer.
Taxation of trusts
In terms of the Income Tax Act, inter vivos trusts (living trusts) are considered taxpayers.
Trusts do not qualify for any tax rebates.
According to SARS, ‘the income of a trust may, depending on the circumstances, be taxed in the hands of the following:
- Donor [Trustor]
- Beneficiary or
- Trust.
Inter vivos trust
- Taxable income is taxed at a flat rate of 45%.
- With regard to capital gains tax (CGT), the inclusion rate for trusts is 80% and the maximum effective rate is 36% (for the 2025 and 2025 tax years).
Special trust
- Taxable income is taxed on a sliding scale from 18% to 45% (the same as natural persons).
- Regarding capital gains tax (CGT), the 40% inclusion rate for CGT applies to both types of special trusts. There is also an annual exclusion of R40 000.
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