A family trust can be a useful estate-planning and asset-management structure, but it is not automatically the right solution for every family.
Creating a trust involves more than signing a trust deed and transferring assets into a new structure. Trustees take on continuing legal, administrative and tax responsibilities, while the founder gives up personal ownership and control of assets transferred to the trust.
Before forming a trust, it is important to understand its purpose, costs and practical consequences.
What is a family trust?
A family trust is commonly an inter vivos trust established during a person’s lifetime for the benefit of selected family members or a defined group of beneficiaries.
The founder, also called the donor or settlor, creates the trust through a written trust deed. Assets are placed under the control of trustees, who must administer them in accordance with the trust deed and for the benefit of the beneficiaries.
South African law distinguishes between an inter vivos trust, created between living persons, and a testamentary trust, created through a valid Will and taking effect after death. Trust administration is governed by the Trust Property Control Act and overseen by the Master of the High Court.
A trust is not simply another bank account belonging to the founder. Trust assets must be kept separate from the personal estates of the founder, trustees and beneficiaries.
Who are the main parties to a trust?
The founder
The founder creates the trust and usually makes the initial donation or transfers the first asset to it.
The founder determines the trust’s broad purpose and appoints the first trustees and beneficiaries in the trust deed. Once assets have been validly transferred, however, the founder cannot continue treating them as personal property.
The trustees
The trustees are responsible for administering and controlling the trust assets.
They must act jointly, honestly and in accordance with the trust deed. Trustees may not begin acting merely because they are named in the document. They must first receive written authority from the Master of the High Court.
Their responsibilities may include:
- Safeguarding trust assets
- Opening and operating trust bank accounts
- Making investment and property decisions
- Keeping accounting and supporting records
- Holding properly constituted trustee meetings
- Recording decisions in written resolutions
- Managing distributions to beneficiaries
- Submitting tax returns
- Maintaining beneficial-ownership information
- Acting impartially and in the beneficiaries’ interests
Being appointed as a trustee is a serious legal responsibility rather than an honorary position.
The beneficiaries
Beneficiaries are the people or organisations who may benefit from the trust.
In a discretionary trust, trustees generally decide whether, when and in what amounts benefits will be distributed, subject to the trust deed.
In a vested trust, beneficiaries may already have fixed rights to certain income, capital or assets.
The wording of the trust deed determines the rights of beneficiaries and the powers of trustees.
Why do families create trusts?
Families establish trusts for different reasons. A trust should be created for a clear and legitimate purpose rather than because it is commonly marketed as a general solution.
Possible purposes include:
- Preserving assets for future generations
- Managing assets for minor children
- Providing for a family member with a disability
- Protecting family wealth from poor personal financial decisions
- Holding family investments or immovable property
- Creating continuity when a family member dies
- Supporting business-succession planning
- Separating ownership from day-to-day benefit
- Managing assets for a defined charitable or family purpose
The suitability of a trust depends on the family’s assets, risks, tax position, long-term objectives and ability to maintain the structure properly.
When may a family trust be appropriate?
When assets need long-term management
A trust may be useful when assets need to be managed over many years rather than transferred outright to an individual.
For example, parents may want investments or property to be managed for children until they reach a suitable age. The trust deed can guide trustees on how income and capital may be used for education, healthcare, maintenance and other needs.
When a family member cannot manage assets independently
A trust may provide an organised structure for managing assets for a person who is too young or otherwise unable to manage significant property independently.
The trustees can administer the assets and make decisions within the powers granted by the trust deed.
Careful drafting is essential to ensure that the structure meets the beneficiary’s circumstances and any requirements applicable to a special trust.
When continuity is important
Personally owned assets become part of an individual’s deceased estate when that person dies. Assets properly owned by a trust do not change ownership simply because a trustee or beneficiary dies.
This can provide continuity in the management of investments, property or family business interests.
However, the trust must have properly appointed trustees, a workable succession process and accurate records.
When a family wants to preserve assets across generations
A trust may help preserve selected assets for the benefit of more than one generation.
Instead of dividing an asset among several heirs, the trust may continue holding it while the beneficiaries receive income, use or other benefits under the trust deed.
This can be useful for certain investment portfolios, family properties or business interests, but it can also create disputes where beneficiaries have different expectations.
When structured business succession is required
A trust may form part of a broader succession plan for family-owned businesses.
It can provide continuity in ownership of shares or other interests while management responsibilities pass to the next generation.
This requires careful coordination between the trust deed, company documents, shareholder agreements, Wills and tax planning.
When might a trust not be the right choice?
When the estate is simple or relatively small
The cost and administration of a trust may not be justified where a person has limited assets and straightforward estate-planning needs.
A properly drafted Will, suitable insurance policies and updated beneficiary nominations may provide a simpler solution.
When the founder wants to retain complete personal control
A person who transfers an asset to a trust cannot continue treating it as their own property.
Trustees must exercise independent judgement and act jointly. The founder cannot simply instruct them to use trust assets for any personal purpose.
Where the founder intends to retain unrestricted control, a trust may not be appropriate.
When the only purpose is to avoid tax
A trust should not be created on the assumption that it automatically reduces tax.
Tax may arise when assets are donated, sold or distributed. Income and capital gains may be taxed in the hands of the trust, beneficiary or donor, depending on the circumstances and applicable tax provisions.
SARS treats a trust as a taxpayer, and every trust must register for income tax and submit annual returns, even where it is inactive.
Tax advice should therefore be obtained before establishing or funding a trust.
When the family will not maintain proper records
A trust requires continuing administration.
Trustees must keep financial records, resolutions, supporting documents, beneficiary information and tax records. They must also keep trust property separate from their personal assets.
A trust that exists only on paper but is operated as the founder’s personal account can create significant legal and tax risks.
Does a trust protect assets from creditors?
A properly established and administered trust may separate trust property from the personal estates of the founder, trustees and beneficiaries.
However, a trust is not an automatic or absolute shield against creditors.
Asset protection may fail where:
- The trust is a sham or alter ego
- The founder continues exercising unrestricted control
- Trustees do not act independently
- Assets are transferred to prejudice existing creditors
- Trustee resolutions and records are missing
- Trust and personal funds are mixed
- The trust deed is ignored
- A trustee or beneficiary has personal rights that may be attached
The strength of the structure depends heavily on its purpose, timing and administration.
Assets should not be transferred to a trust as a last-minute attempt to avoid an existing legal obligation or creditor.
Does a trust reduce estate duty?
Assets that are genuinely owned by a trust do not automatically form part of a founder’s deceased estate merely because the founder dies.
However, forming and funding a trust can have tax consequences. Loan accounts, donations, capital gains, income tax and anti-avoidance provisions may all need to be considered.
The founder may also retain rights or claims against the trust that remain assets in the founder’s estate.
A trust should therefore form part of a wider estate plan rather than being treated as a guaranteed estate-duty solution.
How is a family trust created?
1. Define the purpose
The first step is to identify what the trust is intended to achieve.
The purpose should be clear, lawful and practical. This affects how the beneficiaries, trustee powers, distribution provisions and succession arrangements are drafted.
2. Identify the founder, trustees and beneficiaries
The trust deed must identify or provide a method for identifying the relevant parties.
Trustees should be selected based on competence, trustworthiness, availability and willingness to act. Where family members are appointed, consideration should also be given to appointing an experienced independent trustee.
3. Draft the trust deed
The trust deed is the founding document of an inter vivos trust.
It should address matters such as:
- The trust’s name and purpose
- The appointment and removal of trustees
- Trustee decision-making procedures
- Trustee powers and limitations
- Beneficiary definitions
- Income and capital distributions
- Trustee remuneration
- Recordkeeping requirements
- Amendment procedures
- Dispute-resolution mechanisms
- Termination of the trust
- The destination of assets on termination
Generic documents may not reflect the family’s circumstances and can produce unintended consequences.
4. Register the trust with the Master
An inter vivos trust must be registered with the Master of the High Court with jurisdiction.
The Master requires the trust deed and prescribed supporting documents before issuing Letters of Authority to the nominated trustees.
Trustees may not legally administer the trust property until the Master has authorised them to act.
5. Register the trust with SARS
The trust must be registered with SARS for income tax.
SARS confirms that all trusts must register, whether resident or non-resident, active or passive. The appointed representative taxpayer is responsible for the trust’s tax compliance.
Other tax registrations may also be required, depending on the trust’s activities.
6. Transfer or acquire the assets
Creating a trust does not automatically move a person’s existing assets into it.
Each asset must be properly donated, sold, ceded or transferred. Immovable property must be transferred through a conveyancer and registered in the trustees’ names in their official capacities.
Before any transfer, the parties should consider:
- Transfer duty or VAT
- Capital gains tax
- Donations tax
- Existing mortgage bonds
- Finance arrangements
- Loan accounts
- Conveyancing costs
- Restrictions in contracts or company documents
What are the trustees’ continuing duties?
The work does not end once Letters of Authority have been issued.
Trustees must continue to administer the trust properly. This includes:
- Acting jointly unless the deed validly provides otherwise
- Following the trust deed
- Avoiding conflicts of interest
- Keeping trust assets separate
- Maintaining financial records
- Preparing annual financial statements where required
- Keeping minutes and written resolutions
- Updating trustee and beneficiary information
- Submitting annual tax returns
- Maintaining beneficial-ownership records
- Managing distributions properly
- Keeping records of loans and donations
- Informing the Master and SARS of relevant changes
The Master maintains a beneficial-ownership registration system, and trustees are required to keep and submit prescribed information about beneficial owners.
What are the tax responsibilities of a trust?
A trust is subject to ongoing tax compliance.
All trusts must submit annual income-tax returns, including trusts that had no economic activity during the year. Trustees may also need to submit provisional-tax returns and third-party information relating to distributions and beneficiaries.
Depending on the transaction, tax may be payable by:
- The trust
- A beneficiary
- The founder or donor
- Another person under specific anti-avoidance rules
The treatment of income and capital gains depends on how amounts are earned, retained, vested or distributed.
Trustees should obtain advice from a qualified tax professional and should not make distributions based only on an assumed tax benefit.
Common mistakes in family trusts
Common problems include:
- Using a generic trust deed without proper advice
- Appointing trustees who do not understand their duties
- Allowing one person to make all decisions
- Failing to obtain Letters of Authority
- Transferring assets before trustees are authorised
- Treating trust money as personal money
- Failing to open a separate bank account
- Making decisions without trustee resolutions
- Keeping incomplete accounting records
- Failing to submit tax returns
- Ignoring beneficial-ownership requirements
- Making distributions that are not permitted by the deed
- Failing to update trustees after death, resignation or incapacity
- Assuming that the trust automatically protects every asset
- Failing to coordinate the trust with Wills and business documents
These mistakes can undermine the trust’s purpose and expose trustees to personal liability or regulatory consequences.
Questions to ask before creating a trust
Before proceeding, consider:
- What specific problem is the trust intended to solve?
- Which assets will be transferred to it?
- What will the transfer cost?
- Who will act as trustees?
- Can the trustees act independently and jointly?
- Who should benefit, and under what conditions?
- How will ongoing administration be paid for?
- What are the expected tax consequences?
- How will the trust fit into the founder’s Will?
- What happens when a trustee dies or resigns?
- Is a trust simpler and more effective than the available alternatives?
A trust should have a clear purpose that justifies its ongoing complexity and cost.
Why professional trust advice matters
A trust can continue for decades and affect several generations. Poor drafting or administration may result in disputes, unexpected tax liabilities, difficulty accessing assets or challenges from creditors and regulatory authorities.
De Wet – Van der Watt Inc. assists clients with:
- Evaluating whether a trust is appropriate
- Drafting inter vivos trust deeds
- Registering trusts with the Master
- Appointing and changing trustees
- Preparing trustee resolutions
- Advising on trustee duties
- Coordinating trusts with Wills and estate plans
- Assisting with the transfer of property to trusts
- Amending or terminating existing trusts
Considering a family trust?
A family trust can be valuable when it is created for the right reasons and managed properly.
De Wet – Van der Watt Inc. can help you assess whether a trust suits your family’s circumstances and establish a structure that is legally sound, practical and aligned with your estate-planning objectives.
Learn more about our Formation of Trusts practice area or contact the firm to arrange a consultation.
Disclaimer: This article provides general information and does not constitute legal, tax or financial advice. Trust structures and family circumstances differ, and professional advice should be obtained before creating, funding, amending or terminating a trust. Legislation, tax rules and regulatory requirements may change.