Main Differences Between a Trust & a Will
Purpose
Will: A Will is a legal document that outlines how you want your assets to be distributed after your death. Its primary purpose is to ensure that your wishes are carried out and that your loved ones are taken care of.
Trust: A Trust is a separate entity that holds ownership of your assets, which are then managed by a Trustee for the benefit of your beneficiaries. The primary purpose of a Trust is to manage and distribute your assets according to your wishes, while minimizing taxes, avoiding probate, and protecting your loved ones.
Asset Distribution
Will: A Will distributes assets after your death, and the process is typically overseen by the Master of the High Court.
Trust: A Trust distributes assets during your lifetime or after your death, and the process is managed by the Trustee.
Probate
Probate is a legal process that occurs after someone's death, where the Master of the High Court supervises the administration of the deceased person's estate. The primary purpose of probate is to ensure that the deceased person's assets are distributed according to their Will, or according to the Intestate Succession Act if there is no Will.
Will: A Will must go through probate, which can be a time-consuming and costly process.
Trust: A Trust avoids probate, as the assets are already owned by the Trust and are not part of your personal estate.
Taxation
Will: A Will does not provide any tax benefits, and the estate may be liable for estate duty and other taxes.
Trust: A Trust can provide tax benefits, such as minimizing estate duty and income tax, and can also be used to reduce taxes on capital gains.
Flexibility
Will: A Will is a rigid document that cannot be changed after your death.
Trust: A Trust is a flexible entity that can be amended or terminated during your lifetime, and can also be used to make changes to your estate plan.
Confidentiality
Will: A Will is a public document that can be accessed by anyone.
Trust: A Trust is a private document that is not publicly accessible, providing greater confidentiality and protection for your beneficiaries.
Cost
Will: A Will is typically less expensive to set up than a Trust.
Trust: A Trust can be more expensive to set up and maintain than a Will, but it can also provide greater benefits and protection for your loved ones.
Trusts: Cost, Tax & Debt
Benefits of having a trust:
Asset protection: Trusts shield assets from creditors, lawsuits, and financial risks.
Tax efficiency: Trusts can minimize tax liabilities and optimize tax planning.
Estate planning: Trusts ensure assets are distributed according to your wishes, bypassing intestacy laws.
Confidentiality: Trusts maintain privacy, as assets and beneficiaries are not publicly disclosed.
Flexibility: Trusts can be tailored to suit specific needs and goals.
Continuity: Trusts ensure business or asset continuity, even in the event of death or incapacitation.
Should you have a trust? Consider the following:
Wealth protection: If you have significant assets, a trust can safeguard them.
Business ownership: If you own a business, a trust can ensure continuity and protect assets.
Family dynamics: If you have complex family relationships or concerns about inheritance, a trust can provide clarity.
Tax planning: If you’re concerned about tax implications, a trust can offer optimization strategies.
Estate planning: If you want to ensure your wishes are respected, a trust can provide peace of mind.
Trust types: There are two main types:
Inter Vivos Trusts (created during your lifetime)
Testamentary Trusts (created through your Will after death)
Taxation of Trusts
Tax rates: Trusts are taxed at a flat rate of 45% on taxable income (excluding special trusts)
Tax thresholds: R460,000 – R555,000 (2024 tax year)
Taxation of beneficiaries: Beneficiaries are taxed on income distributed to them
Hidden Costs
Setup and Administration Costs: Attorney fees for drafting trust deed, Trust registration fees, Initial trust administration fees, Annual trust administration fees.
Ongoing Fees: Trustee fees (0.5% – 2% of trust assets per annum), Auditor fees, Accounting fees, Tax consultant fees
Fiduciary fees (for services like estate administration)
Executor fees (if trust is created through a Will)
Conveyancing fees (for property transfers)
Bank charges (for trust banking services)
Insurance premiums (for trust assets)
Tax-Related Costs:
Donations tax (20% on donations to trust above R100,000 annual exemption)
Capital Gains Tax (CGT) (45% effective rate for trusts)
Transfer duty (payable on property transfers to trust)
Value-added tax (VAT) (may apply to trust transactions)
Opportunity Costs:
Investment management fees (if trust assets are invested)
2. Interest rates (on trust loans or investments)
3. Inflation risk (on trust assets)
Consequences of Poor Trust Administration:
SARS penalties for non-compliance
Legal disputes among beneficiaries
Loss of asset value due to poor management
Reputation damage
Debt
When a deceased person has debt, it can impact the Trust established as part of their estate planning. Here are key implications:
General Principles:
- Debts die with the deceased, but liabilities remain.
- The Executor (or Trustee) must settle debts before distributing assets.
- Creditors have a claim against the deceased’s estate.
Trust-Specific Implications:
Trust assets are protected: Trust assets are generally protected from creditors, but:
- Assets transferred to the trust within 2 years of death may be clawed back.
- Creditors may challenge trust transactions.
Debt settlement: The Trustee must settle debts using estate assets, potentially reducing trust distributions.
Creditors’ claims: Creditors can claim against the trust for debts incurred by the deceased.
Insolvent estate: If debts exceed estate assets, the trust may be impacted.
Types of Debt:
1. Secured debt: Bond, mortgage, or other secured loans - Creditors can claim against specific assets (e.g., property).
2. Unsecured debt: Credit cards, personal loans, or other unsecured loans - Creditors can claim against the estate’s residual assets. Credit cards, personal loans, or other unsecured loans - Creditors can claim against the estate’s residual assets. Credit cards, personal loans, or other unsecured loans - Creditors can claim against the estate’s residual assets.
Trustee’s Responsibilities:
– Notify creditors and advertise for claims.
– Verify debts and prioritize payments.
– Settle debts using estate assets.
– Distribute remaining assets to beneficiaries.
Potential Consequences:
– Reduced trust distributions.
– Delayed distribution of assets.
– Increased administration costs.
– Potential litigation.
Mitigation Strategies:
1. Debt consolidation: Before establishing the trust.
2. Life insurance: To cover outstanding debts.
3. Asset protection: Using trusts, offshore accounts, or other structures.
4. Estate planning: Regularly review and update your Will and trust.
Liquidity
Liquidity in a Trust refers to the availability of cash or easily convertible assets to meet the trust’s financial obligations, expenses, and beneficiary distributions.
Why Liquidity is Important:
– Settling debts and creditors’ claims
– Paying administration costs (e.g., trustee fees, taxes)
– Funding beneficiary distributions
– Meeting unexpected expenses
Sources of Liquidity:
– Cash reserves
– Easily convertible assets (e.g., stocks, bonds, money market instruments)
– Liquidation of trust assets (e.g., property, investments)
– Loans or credit facilities (if necessary)
Liquidity Considerations:
Trust type: Inter Vivos Trusts vs. Testamentary Trusts
Asset composition: Cash, investments, property, businesses
Beneficiary needs: Immediate or ongoing distributions
Tax implications: Capital Gains Tax, income tax
Administration costs: Trustee fees, auditing, accounting
Common Liquidity Challenges:
– Illiquid assets (e.g., property, art)
– Insufficient cash reserves
– Unexpected expenses or beneficiary demands
– Market volatility impacting trust investments
– Inadequate trustee expertise
Let M.A.L.I calculate your Liquidity. Never estimate with important things like this, do it the right way!
What happens without a Trust:
1. Loss of government benefits: Without a trust, assets may be considered when determining eligibility for government benefits, potentially leading to loss of support.
2. Waste or mismanagement of assets: Assets may be squandered or misused, compromising the child’s well-being.
3. Lack of tailored support: Without a trust, support and care may not be tailored to the child’s specific needs.
4. Uncertainty and insecurity: The child’s future may be uncertain, causing anxiety and stress for the family.
5. Minor’s inheritance is paid to the Guardian’s Fund: Without a trust, the minor’s inheritance is paid to the Guardian’s Fund, which may have restrictions and limitations.
6. Limited access to funds: The minor’s guardian may have limited access to funds, potentially hindering the child’s education and maintenance
Why a trust is important:
1. Protection of assets: A trust safeguards assets from being wasted or misused, ensuring they are utilized for the child’s benefit.
2. Government benefits preservation: A trust helps preserve government benefits, such as disability grants, by ring-fencing assets and preventing them from being considered when determining eligibility.
3. Tailored support: A trust allows for customized support and care, addressing the unique needs of the child.
4. Continuity and stability: A trust ensures continuity and stability, even if the parents or caregivers pass away or become incapacitated.
5. Minor’s inheritance: A trust manages the minor’s inheritance until they reach the age of majority (18 in South Africa).
6. Education and maintenance: A trust ensures funds are available for education, maintenance, and extramural activities.
7. Guardianship: A trust can appoint guardians to care for the minor, ensuring their physical and emotional well-being.
Are Trusts still relevant in South Africa?
A trust is a legal arrangement where assets are administered by a trustee on behalf and for the benefit of the beneficiaries of the trust. Ownership of the assets is relinquished to the trust.
Tax aside, trusts fulfil an important function in society.
Read the Invest article HERE
Types of Trust | South Africa
Broadly speaking there are a number of ways in which Trusts in South Africa can be classified. This includes the following classifications:
Visit the SARS page HERE