Is the time right to consider forming a trust?
December 17th, 2021 10:24
2021 turned out to be a challenging year for many people and very few of us had the time to reflect and consider our personal financial and estate planning. Many jobs have been lost and it proved to be particularly challenging for business owners. A number of people can attest to the devastating consequences of not having one’s financial affairs in order by the time one is faced with a financial challenge and upon someone’s death. Now that many people are taking a holiday break, it may be wise to reflect and to consider one’s personal financial situation and estate plan.
Have a will
Dying without a will may have devastating consequences for your loved ones and will certainly prevent you from leaving a legacy of love. Dealing with death, as many have experienced recently with Covid, is traumatic enough. To leave loved ones destitute, while mourning your death can be prevented if you have a valid, well constructed will. If you have minor children, it is reckless to not have a will, creating at least a testamentary trust upon your death if there is no trust already created, as your money may have to be paid into the government’s Guardian’s Fund, attracting a low-interest rate, with limited access to the funds until your children turn eighteen. Your will is a living document and should always be up to date and reflect your current wishes in terms of how you would like your assets to be distributed upon your death.
Consider a trust
Trusts are still relevant today if they are used correctly. They are the only vehicles with the following attractive advantages:
· Asset protection – You can separate your personal assets from your business or property holding if you are an entrepreneur.
· Flexibility to cater for varying circumstances and events - A discretionary trust is extremely flexible and can be used to take into account any family, financial and legislative circumstances. A trust also provides assistance for those tricky situations where people marry for a second or third time, and there are children from the previous marriage(s).
· Family asset management - A trust can provide a centralised asset management structure, as well as controlled distributions for beneficiaries who are not in a position to manage assets themselves due to prodigality (excessive or extravagant spending). A trust can also provide for joint ownership of indivisible assets, such as holiday homes and farms.
· ‘Insurance’ should something go wrong with your mental or physical health - In the case of serious forms of mental illness, a person may no longer be able to look after their personal affairs. It may be wise to consider a trust to prevent a court appointed curator to administer all your assets. You can set up the trust with a hand-picked board of trustees who are known to you to look after your financial affairs in the event that you are no longer able to do so.
· Preserve your wealth for future generations - If you bequeath your estate to individuals, it may become a case of easy come, easy go. A trust is the most effective vehicle for the preservation of wealth. A well-run trust allows succeeding generations to participate in, and benefit from, the wealth created in one generation.
· Protect other people - Often particular family members (such as people with disabilities) need special attention, and trusts are used to provide funds to look after those family members. Sometimes children have special challenges, which inhibit their ability to manage their own financial affairs. A trust is the perfect solution for such persons.
· Life continues for your family after death – no estate freezing - It is wise to arrange your affairs in such a way that when you are no longer here, your personal and financial affairs will continue with minimal disruption. Death does not interrupt the operation of a trust. To the contrary, an individual’s estate is frozen upon their death and it may take a long time to finalise the estate and give heirs access to estate assets.
· Protect your family from liquidity issues resulting from your death – Upon death, death costs and taxes in excess of 30% may become payable. This includes estate duty, executor’s fees and capital gains tax. This may create a liquidity issue in the estate. Very few people are aware of all the costs and taxes and do not properly plan for their payment. The executor may be left with no alternative than to liquidate some or all the assets just to pay these costs. If the assets were held in trust, these costs and taxes will not be triggered by your death. However, be mindful of loans you may have made to the trust as a result of transferring assets into the trust. These will be included in your estate as an asset. That is why it is important to consider a trust earlier on before substantial wealth is created.
Although a trust is not for everyone, it may be worth one’s while to carefully consider the aspects discussed above and consult a relevant professional who specialises in trusts and estate planning to provide you with the necessary guidance.
~ Written by Phia van der Spuy ~