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Trusts can be used to serve a number of very specific purposes in your estate plan. However, as an estate planner, it is important to be absolutely clear on your intentions for forming the trust and what you intend the trust to achieve.

A trust, which is essentially a tripartite agreement between the trust founder, trustees, and beneficiaries, can take many forms, and it is essential that the type of trust you choose is correctly set up to achieve your estate planning goals.

In this article, we explore when it may be appropriate to set up a trust and what form the trust should take.

Protecting the inheritance of your minor children

Establishing a testamentary trust is advisable if you have children under 18. Under our legal framework, minors lack full contractual capacity, complicating estate planning if assets are directly bequeathed to them. Funds left directly to minors may end up being administered by the state-run Guardian’s Fund until they reach age 18. To prevent this, incorporating a testamentary trust in your will allows assets intended for minors to be designated to the trust. Upon your passing, the trust comes into formation, with appointed trustees managing assets for your children’s benefit until they reach a specified age. This strategy ensures assets are safeguarded and managed appropriately, aligning with your intentions for your children’s future financial security.

Providing for those who are vulnerable or who have special needs

Utilising a trust can be invaluable in providing financial security for children with severe mental or physical disabilities who are incapable of managing their own affairs. Establishing a Special Trust Type A under Section 6B (1) of the Income Tax Act allows for the designation of trustees responsible for managing assets and safeguarding the finances of the disabled child. This trust can be structured as either an inter vivos or testamentary trust, tailored to the founder’s specific requirements. When correctly registered and meeting qualifying criteria, the trust benefits from tax rates akin to those of individuals, ranging from 18% to 45%. Given the susceptibility of mentally disabled children to financial exploitation, a Type A trust ensures assets earmarked for their welfare remain shielded from unscrupulous individuals. 

Managing your affairs in the event of a dementia diagnosis

Establishing an inter vivos trust requires that the trust founder surrenders control of the trust assets during their lifetime, which could be advantageous if diagnosed with conditions like dementia or Alzheimer’s disease. In such instances, trustees would continue managing the trust assets according to the trust deed’s directives. This arrangement spares your loved ones the need for a curator or estate administrator, ensuring assets remain under trusted management. To give effect to this, keep in mind that drafting the trust deed to provide clear directives ensures trustees manage the trust’s income and capital in your best interests. This proactive approach can alleviate concerns about the management of one’s assets should your mental acuity decline, offering peace of mind that your affairs will be looked after in line with your wishes.

Reducing your estate duty liability

If an estate planner owns appreciating assets such as shares or property, an inter vivos trust can be useful in curbing potential estate duty. Transferring such assets – either through sale or donation – to a living trust pegs their value within the estate. Any subsequent asset growth occurs within the trust, limiting estate duty and executor’s fees in the estate planner’s estate to the asset’s initial transfer value. Further, keeping in mind that a trust never dies, the assets will not form part of the beneficiaries’ respective deceased estates, thereby avoiding estate duty once again.

Protecting your assets from creditors

Inter vivos trusts can be useful for safeguarding personal assets from potential bankruptcy or insolvency stemming from risky business ventures. This would involve transferring personal assets like homes and investments into a trust, provided the estate remains in a solvent position once you have relinquished control of the trust assets. In the event of business insolvency, assets held in trust are shielded from creditors, subject to certain exceptions. Importantly, the trust founder, in such circumstances, must be seen to relinquish full control of the assets to the trust. If not, the courts may lead an investigation to determine whether the trust is being used for ‘sham’ purposes and, if found to be so, creditors may be able to attack those assets.

Securing a growth asset for future generations

A trust can be useful for securing assets such as a family farm or holiday home for future generations, safeguarding against potential alienation or sale. In such circumstances, the trust serves as a valuable succession planning tool by ensuring that multiple beneficiaries across successive generations can enjoy the asset without fear of it being alienated or sold. In order to achieve this, the trust founder would need to set up an inter vivos trust and sell the property to the trust. The loan account would reflect in the trust’s accounts and form part of the trust founder’s deceased estate.

As a growth asset, the value of the property held in trust is likely to continue to grow over time, although the value of the asset appears in the deceased’s estate at the selling price. As a result, all growth in the value of the asset will take place in the trust and will not attract estate duty in the trust founder’s deceased estate. Through your trust deed, you can set out whether the trust is a vesting or discretionary one, and which beneficiaries may receive income from the trust and which may receive capital.

In circumstances where there are multiple beneficiaries, setting up a trust solves the problem of having to divide up an asset between the various beneficiaries, and provides a vehicle through which the home or farm can be jointly owned by all the nominated beneficiaries.

Providing for a surviving spouse

Assets that form part of your deceased estate are subject to estate administration and the somewhat lengthy winding-up process. To provide financially for your surviving spouse and to avoid delays in their having access to money, a trust can be used to house assets intended for their benefit. Once again, the wording and mandate contained in the trust deed are of the utmost importance to ensure that your surviving spouse receives the benefits due to them.

The flexibility in setting up a trust allows you to determine how the income and capital of the trust will be managed. For instance, you may nominate your surviving spouse as an income beneficiary of the trust, while appointing your children as capital beneficiaries. In doing so, your surviving spouse will be entitled to the income from the trust and, in the event of their passing, your children would be beneficiaries of the trust capital. This is generally a much simpler and more efficient way of providing for a surviving spouse and children than incorporating a personal servitude, such as a usufruct, into your will.