Let a trust protect you during your life when you need it most

Lately a number of people who created trusts in the past are questioning their rationales for creating trusts, especially given new taxes implemented to discourage estate owners to structure their affairs using trusts. When transferring assets into a trust, it is not only about considering the tax savings or the additional taxes payable on such assets. It is also about a strategy to protect your assets, to create continuity and liquidity upon your death, as well as other considerations, such as a contingency plan should you develop a mental illness such as Alzheimer’s Disease.

A discretionary trust is extremely flexible and can be used to take into account any family, financial and legislative circumstances. This means that the trustees can manage the trust’s assets in the best interests of the beneficiaries, at any particular time, by taking into account all the relevant factors at that time. This flexibility caters for uncertainties such as divorce, insolvency, increase in family size or fortunes, changes of beneficiaries’ needs and circumstances, and changes in tax legislation, provided the beneficiaries are defined, and the trust deed is drafted in such a way as to anticipate these uncertainties.

In many instances people were advised that they could not act as founders and trustees, and at the same time be beneficiaries. So they were advised to only make their children and their descendants beneficiaries. Things do not always work out the way it is planned. A change in the health of the parents is not always considered and planned for. This may create an issue in the event that the parents run out of resources; they will physically not be able to benefit from the trust at all, unless they are listed as beneficiaries. Any payments made by the trust to the parents, if they are not listed as beneficiaries, will attract donations tax at 20% (or 25% for payments above R 30 million).

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). A significant concern is that if the one party bequeaths his or her estate to the new spouse, then this spouse may disinherit the first dying’s children in order to benefit his or her own children. A trust often provides a workable solution to this potential problem so that the current spouse can still enjoy the quality of life that he or she has become accustomed to, while the capital is protected for the first dying’s children. This is done by defining the spouse as an income beneficiary only, and the children as both income and capital beneficiaries. In this case, a trust should be registered for each spouse (and his or her family) to make this arrangement work on a practical level.

Given the increase in mental illnesses and weak family support structures (with many children emigrating or working overseas), a trust can protect you when you need it most. If you have created a trust during your lifetime and become afflicted by a dreadful condition such as Alzheimer's Disease or simple senile dementia, your financial affairs would continue as before, with persons that you entrusted as trustees of the trust, who you have chosen carefully and who know and understand you and your family. The appointment of trustees should be carefully considered in the anticipation of these circumstances. The board of trustees will make decisions related to the trust assets, rather than one individual, such as a curator appointed by Court, with whom you may not have a relationship.