Trusts and its effect on your estate

1. Inter Vivos Trust;
2. Testamentary / Will Trust;
3. Offshore Trust

The Inter Vivos and Testamentary Trusts are governed by way of the Trust Property Control Act 57 of 1988 as well as by a Trust Deed (in the case of an Inter Vivos Trust) or the Will of the deceased (in the case of a Testamentary / Will Trust). An Offshore Trust is not included in the above.

1. Inter Vivos Trust:-

An Inter Vivos Trust is essentially a Trust that was created prior to the death of the deceased and is often also referred to as a family trust.

As mentioned above, this Trust has an existing Trust Deed which dictates the terms by way of which the Trust is to be administered with a Letter of Authority listing the Trustees acting on behalf of the Trust in conjunction with the Trust Property Control Act.

The Trust normally has assets already held within it and the item mostly associated in a deceased estate flowing from this Trust would be a loan account.

The loan account can be either owing to the Trust by the deceased in which case it will be regarded as a liability in the estate or owing to the deceased by the Trust, in which case it will form an asset in the estate.

It is imperative that, when estate planning is attended to for a testator prior to the drafting of their Will, the impact of any Trust and loans the deceased may hold therein is considered carefully. The reason for this is that such a loan could have large repercussions for an estate, for example, liquidity problems or even insolvency in cases where the ratio between the assets held by the deceased in his or her personal capacity (which assets would form a part of their estate) and the loan account specifically owing to the Trust by that deceased are not closely monitored.

The main reason for this is that the Trust could potentially hold substantial assets which value could be substantially more than the assets the deceased own in his or her personal capacity. If the deceased made regular withdrawals from the Trust allocated to a loan account in his or her name, with that loan account forming a liability in their estate it could very well be a possibility that the loan account exceeds the total value of the assets held by the deceased in their personal name, which in turn could lead to a potential insolvent estate, which comes with its own challenges.

Similarly, a credit or asset loan due and payable by the Trust to the deceased (their estate) can have a similar effect on the Trust. In this instance and mainly if the award of the said loan account from the Estate to the heir in terms of the Will is not possible (for whatever reason) the Trust would potentially have to repay that loan to the estate, which could lead to the Trust having to reduce fixed assets to cash to make such payment if it does not hold sufficient liquidity to do so. This may not be ideal for various reasons of which the income tax implications is one example. Furthermore, there are certain interest related loan principles (out of an income tax point of view) that could potentially apply to such a credit loan which would also need to be considered during the estate planning and prior to drafting the testator’s Will.

It is important to note that the assets held by the Trust are held by the Trust as a separate legal entity and those assets would not form a part of the deceased’s estate.

2. Testamentary / Will Trust:-

A Testamentary or Will Trust is created within your Will and is only formed after your death. It would be the duty of the Executor of the estate to ensure that the Trust is formed by way of application made to the Master of the High Court, after the issue of the Letter of Executorship in the estate, with a Letter of Authority (like that issued in an Inter Vivos Trust) being issued to allow the Trustees nominated in the Will, to administer the Trust.

Assets would be awarded to the Trust on distribution of the estate and the calculation and value awarded would be set out in the Liquidation and Distribution Account of the estate. The Executor would have to prove to the Master of the High Court on finalisation of the estate that all assets accruing to the Trust in terms of the provisions of the Will and Liquidation and Distribution Account, have been awarded accordingly.

Thereafter it will become the duty of the Trustees of the Trust, who are often also the Executors of the estate (although this does not necessarily have to be the case) to administer the Trust in terms of the provisions of the Will and The Trust Property Control Act 57 of 1988. This trust can have multiple purposes with one of the main purposes being to utilise for the protection of the inheritance of minor children (currently a minor child would be regarded as an individual below the age of 18 (EIGHTEEN) years). If utilised for this reason the Trust would be set up within the Will with the Testator being able to control the payment of income and capital and to dictate the timing of the termination of the Trust as well as the age at which heirs would become entitled to capital distributions.

In this trust there would be no separate Trust Deed, as the Will would be regarded as the Trust Deed, with all terms related to the Trust administration being set out within the Will and the relevant Act.

This type of Trust is often also utilised where a first dying spouse may not want to leave their assets to the surviving spouse, without some control being exercised over the use of those assets. In this case they would leave their estate or a portion thereof to a Testamentary Trust, with the surviving spouse entitled to all or some of the income and capital earned from the Trust, which terms would be set out in the Will. In this instance the surviving spouse would benefit from the Trust but would not be entitled to award the assets in their Will to other heirs upon their death, as their rights to the Trust would be limited and they would not be the actual owner of the assets. In the event that the surviving spouse is entitled to all income for a specified period of time (without discretionary powers awarded to the Trustees with regards to the said income), it would also have the benefit of the Executor being placed in a position where they can use the relevant Section 4(q) estate duty deduction available to spouses with a proportionate deduction (calculation method dictated by the Estate Duty Act 1955) permitted in this instance based on various factors applicable to that particular Trust in terms of the Will. It is important to mention that, if such a Section 4(q) deduction is utilised in the estate of the first dying, there would generally be a ceasing limited interest calculation for estate duty purposes required in the estate of the last dying, which could lead to estate duty payable in that estate.

For individuals who may not want to set up an Inter Vivos Trust during their lifetime but want to protect assets for whatever reason after death, the Testamentary / Will Trust could be a viable structure to utilise in their Will.

3. Offshore Trust:-

This article will not deal with an offshore trust in detail as this is a much more complex structure set up abroad but it is for purposes of this article important to mention that any loan account in the name of a deceased whether owing to their estate or by their estate to the offshore trust, would also be regarded as an asset or liability in their estate and would have to be dealt with accordingly by the Executor of that estate in conjunction with the trustees of that offshore trust. As one would potentially be dealing with assets held in other currencies a loan in such an offshore trust could also have a big impact on the deceased estate and should be considered carefully during the estate planning stage.

Whilst Trusts remain to be a very useful estate planning tool under certain circumstances, the tax implications that they could have should always be considered carefully.

Authors:

Anica Ungerer, Director - Wills & Trusts

04 September 2023