ALL ABOUT TRUSTS
Phia van der Spuy
Every family’s circumstances are different. And so is their estate planning, or should it be. Some parents create trusts only to provide for minor children in the event of their death; others create trusts to protect the family’s wealth against spendthrift children; others want to leave nest eggs for their children; others may accumulate substantial wealth in trusts for generations to come; and so on. A trust can also be created in terms of a court order (court order trust) – such as a divorce order where a trust is registered for the maintenance of children.
The youth play important roles in trusts, which are often overlooked during the (supposedly ongoing) estate planning process. Few people know that the estate planner can (and should) craft the trust deed in such a way to make specific provision for the purpose of the trust, including specific instructions and guidance to the trustees relating to who is to benefit, when beneficiaries may benefit, how they may benefit, what say they may have in the trust, and whether they should become trustees at some point, among other things.
Testamentary versus inter vivos trusts
During estate planning, one of the decisions is whether you should provide for a testamentary trust (which will only be created upon your death), or whether you should consider registering a living (or “inter vivos”) trust and actively growing assets in the trust during your lifetime for the benefit of one or more future generations. This decision should be driven by your estate planning goals as well as your unique circumstances.
Complex families
A trust provides assistance for those tricky situations where people marry for a second or third time, and there are children from the previous marriage/s. A significant concern is that if a party bequeaths his or her estate to the new spouse, then this spouse may disinherit the children from the party’s previous marriage to benefit his or her own children instead. A trust often provides a workable solution to this potential problem: the current spouse can still enjoy the quality of life that they have become accustomed to, while the capital is protected for the first dying’s children. This is done by defining the spouse as the income beneficiary only and the children as both income and capital beneficiaries. In this case, a trust should be registered for each spouse (and their family) to make this arrangement work on a practical level.
The youth as beneficiaries
The children and further descendants of the founder are typically included as beneficiaries of family trusts. Distributions are often made to capitalise on the tax advantages of using the conduit principle to push the related tax liability to beneficiaries who may not yet pay tax – typically the youth. These distributions are often not paid out to the beneficiaries, as the sole purpose is to save on tax.
Estate planners and trustees should be mindful that once distributions are made to beneficiaries, such amounts or assets vest in those beneficiaries. Those amounts remain payable to the relevant beneficiaries. On their death, it would fall into their estates. Without a will, the beneficiary will die intestate, resulting in monies potentially landing up in the hands of unintended people.
A person can have a will only once they reach the age of 16, so any unpaid distributions made to minor children below the age of sixteen will automatically be dealt with in terms of the intestate succession rules. The trustees will have no say as to who should receive such amounts claimed by the executor upon the death of the minor.
Depending on the family circumstances, given often complicated families, these rights to distributions may end up in unintended hands. It is therefore wise, as soon as beneficiaries reach the age of 16, to draft a will for them. Care should be taken when making (unpaid) distributions to minors below the age of 16, just to save tax.
The youth as future trustees
Proper estate planning should include decisions of the estate planner about the future decision-makers of the trust (the trustees), typically after the estate planner’s death. This is often overlooked. Trust deeds can (and should) be tailored to make provision for follow-up trustees, especially for future generations. In most instances, the estate planners want their children to become their follow-up trustees. If the children are under the age of 18 (and cannot become trustees on the estate planner’s death until they reach the age of 18), provision can be made in the trust deed/will of the estate planner for the nomination of a placeholder trustee, who will act as trustee until such time as the children reach the age of 18. If the children are already 18, provision can be made in the trust deed for the estate planner to nominate one or more children in his or her will.
Conclusion
Neglect of generational succession considerations often lead to hardship and unintended consequences, which may undo the estate planning objectives of the estate planner. That can be avoided through proper (ongoing) estate planning with the help of a professional fiduciary practitioner.
Phia van der Spuy is a Chartered Accountant with a Masters degree in tax and a registered Fiduciary Practitioner of South Africa, a Chartered Tax Adviser, a Trust and Estate Practitioner and the founder of Trusteeze, the provider of a digital trust solution.