The Benefits, Costs and Compliance of Setting Up a Trust
This blog forms part of TVC Wealth and Health Managers’ financial education content series. It includes expert insights shared during our recent discussion with Arno Nell from C2M Chartered Accountants. Stay tuned to our channels for more conversations that make complex financial topics easier to understand!
Introduction
Trusts can be a powerful financial tool – but they’re also widely misunderstood. To help clear the confusion, we spoke to Arno Nell from C2M Chartered Accountants, who helped us unpack what trusts are, why they matter, and how they can help protect assets and build generational wealth – specifically in the context of South Africa.
At its core, a trust is a legal arrangement where assets are held and managed by trustees on behalf of the beneficiaries. This setup helps ensure that assets are protected, passed on efficiently, and used according to the donor’s wishes.
At its core, a trust is a legal arrangement where assets are held and managed by trustees on behalf of the beneficiaries. This setup helps ensure that assets are protected, passed on efficiently, and used according to the donor’s wishes.
Who Should Consider a Trust – and Why?
So, when does setting up a trust make sense? Arno Nell explains that the most common reason clients choose to set up a trust is asset protection – particularly from creditors. Trusts also ensure that assets are distributed according to the donor’s wishes after their passing.
Trusts are especially useful when beneficiaries are minors or people unable to manage their own financial affairs. Importantly, trusts are not just for the wealthy. If you own a business, for example, a trust can be a smart structure to have in place early – before significant value is created.
Setting up a trust is particularly worthwhile for business owners. One common and effective approach is to set up a trust before your business gains significant value, and have the trust hold shares in the business from the outset.
Trusts are especially useful when beneficiaries are minors or people unable to manage their own financial affairs. Importantly, trusts are not just for the wealthy. If you own a business, for example, a trust can be a smart structure to have in place early – before significant value is created.
Setting up a trust is particularly worthwhile for business owners. One common and effective approach is to set up a trust before your business gains significant value, and have the trust hold shares in the business from the outset.
Different Types of Trusts
There are two main types of trusts commonly used in South Africa:
1. Inter Vivos Trusts (also known as Living or Discretionary Trusts)
An inter vivos trust is created while the donor is still alive. It’s typically used for wealth creation and asset protection. These are particularly useful for long-term financial planning and are often part of a business owner’s succession strategy.
There are two sub-types of inter vivos trusts:
– Discretionary Trusts: Trustees have the discretion to decide how and when assets are distributed to beneficiaries.
– Non-Discretionary Trusts: The trust deed specifies fixed rules about when and how assets are distributed.
2. Testamentary Trusts
A testamentary trust is established in terms of a person’s will and only comes into effect upon their death. It’s commonly used to manage and protect assets for dependents, such as minor children or individuals with disabilities.
1. Inter Vivos Trusts (also known as Living or Discretionary Trusts)
An inter vivos trust is created while the donor is still alive. It’s typically used for wealth creation and asset protection. These are particularly useful for long-term financial planning and are often part of a business owner’s succession strategy.
There are two sub-types of inter vivos trusts:
– Discretionary Trusts: Trustees have the discretion to decide how and when assets are distributed to beneficiaries.
– Non-Discretionary Trusts: The trust deed specifies fixed rules about when and how assets are distributed.
2. Testamentary Trusts
A testamentary trust is established in terms of a person’s will and only comes into effect upon their death. It’s commonly used to manage and protect assets for dependents, such as minor children or individuals with disabilities.
Myths and Mistakes to Avoid
There are several myths and misconceptions surrounding trusts. According to Arno, the two most common are:
Myth 1: Trust Funds are only for the rich
In reality, waiting until you’re wealthy to set up a trust can create unnecessary tax complications. Getting started early is often more cost-effective.
Myth 2: The tax is bad on Trusts
Yes, trusts are taxed at a high rate—but the conduit principle allows income and capital gains to be taxed at the beneficiaries’ lower individual tax rates, if distributed correctly.
Common mistakes when setting up or managing a trust include:
– Thinking the work ends once the trust is registered.
– Not complying with the Trust Property Control Act.
– Failing to register the trust with SARS and meet ongoing filing and reporting obligations.
Myth 1: Trust Funds are only for the rich
In reality, waiting until you’re wealthy to set up a trust can create unnecessary tax complications. Getting started early is often more cost-effective.
Myth 2: The tax is bad on Trusts
Yes, trusts are taxed at a high rate—but the conduit principle allows income and capital gains to be taxed at the beneficiaries’ lower individual tax rates, if distributed correctly.
Common mistakes when setting up or managing a trust include:
– Thinking the work ends once the trust is registered.
– Not complying with the Trust Property Control Act.
– Failing to register the trust with SARS and meet ongoing filing and reporting obligations.
How to Set Up a Trust
The first and most important step is drafting the trust deed. Arno cautions against using a generic template – each trust should be tailored to the donor’s unique situation and goals.
Once the deed is finalised and signed by all relevant parties, it is submitted to the Master’s Office for official registration.
Once the deed is finalised and signed by all relevant parties, it is submitted to the Master’s Office for official registration.
The Fine Print: Trust Compliance
Tax and Trusts:
Another benefit of setting up a trust is the potential tax efficiency it offers. According to Arno, some of the key tax benefits include:
– Estate duty planning
– Donations tax considerations
– Application of the conduit principle, allowing income and capital gains to be taxed at a lower individual rate when distributed
Important Legal Updates:
Recent changes in trust regulations are important to note:
1. Beneficial ownership reporting is now required annually with the Master’s Office.
2. IT3T income tax certificates must be issued to SARS, ensuring all distributions are declared in the beneficiaries’ tax returns.
Another benefit of setting up a trust is the potential tax efficiency it offers. According to Arno, some of the key tax benefits include:
– Estate duty planning
– Donations tax considerations
– Application of the conduit principle, allowing income and capital gains to be taxed at a lower individual rate when distributed
Important Legal Updates:
Recent changes in trust regulations are important to note:
1. Beneficial ownership reporting is now required annually with the Master’s Office.
2. IT3T income tax certificates must be issued to SARS, ensuring all distributions are declared in the beneficiaries’ tax returns.
Conclusion
Trusts are not just for the wealthy – they’re a valuable tool for anyone who wants to protect their assets, plan for future generations, or structure their business efficiently.
To recap:
To recap:
- Trusts can help protect your assets and reduce estate duty.
- They offer flexible ways to distribute wealth according to your wishes.
It’s crucial to get your structure in place early, before wealth is accumulated. - Always manage the trust actively and in full compliance with the law.
- And most importantly – work with experienced professionals, like TVC Wealth and Health Managers, who can guide you through setup and compliance.
Stay tuned for more accessible financial education content on our blog or watch the full video interview with Arno Nell on our YouTube channel here.
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