👀Understanding How a Trust Works in South Africa: A Comprehensive Guide

What is a trust?

A trust in South Africa is a legal arrangement where assets are managed by trustees on behalf of beneficiaries. It’s created through a trust deed, outlining the purpose and terms of the trust. Trusts can be used for various purposes, such as protecting family wealth, estate planning, or providing for minors.

Types of trusts

Testamentary Trusts

Testamentary Trusts are created at the winding up of a deceased estate following a specific stipulation in the deceased person’s will that a Trust must be set up. Testamentary Trusts are usually created to hold assets on behalf of minor children, since minor children cannot in terms of South African law inherit anything (in the absence of a Trust, assets from the deceased estate left to minor children are sold, and the money is paid to them when they reach adulthood).

An Inter-Vivos Trust

An Inter-Vivos Trust is established by someone during their lifetime to manage certain assets or investments and support beneficiaries, such as family members. These can be vested or discretionary trusts.

Vested Trusts

In vested Trusts, the benefits of the beneficiaries are set out in the Trust deed.

Discretionary Trusts

In discretionary Trusts the Trustees have full discretion at all times about how much each beneficiary is to benefit.

PARTIES TO A TRUST

Trustees

The Trustees are the custodians of the assets in the Trust, but do not necessarily have an interest in the assets. In order to promote the independence of the Trust, it is advisable to appoint at least one independent Trustee

Beneficiaries

The beneficiaries are the individuals / entities entitled to benefit from the Trust assets or income

Founder

Person setting up the Trust

Inter-vivos trust vs testamentary trust

Inter-Vivos trust

An Inter-Vivos Trust is established by someone during their lifetime to manage certain assets or investments and support beneficiaries, such as family members. An Inter Vivos Trust is a core and most effective form of estate planning. At the outset, an Inter Vivos Trust must be distinguished from a Testamentary Trust. The former is created during the lifetime of a person by agreement between that person (referred to as the Founder) and another person(s) who is referred to as the Trustee(s). By creating an Inter Vivos Trust an individual essentially creates another legal entity in which certain assets can be housed, which then will be administered and dealt with in terms of the Trust Deed created by the Founder.

These Trusts are governed by a Trust deed, rather than a Will. These Trusts allow assets to be managed on behalf of beneficiaries and, in some cases, generations of a family, without having to passthrough the estate of family members that have passed away. An Inter Vivos Trust is often referred to as a Family Trust, and is an entity which is formed during the life of a person. Typically, a Settlor or Donor will enter into a contract with Trustees, the terms of which will be contained in a Deed of Trust, in terms of which the Settlor will donate to or settle upon the Trust, a sum of money in order to establish the Trust, and appoint Trustees to administer the Trust fund, for the benefit of beneficiaries which will be described in the Trust Deed. The objects of the Trust are usually to provide an income for the beneficiaries, to provide funds for the housing, care, maintenance, education, general welfare, recuperation, health, entertainment or pleasure or advancement of life of the interests of any beneficiary, and to transfer the assets to the capital beneficiaries upon termination of the Trust. Inter Vivos Trusts can be created with the Vesting of assets or benefits in beneficiaries stipulated in the Trust Deed whereby the assets vest in the named beneficiaries, but the assets and benefits flowing from them, are required to be administered by the Trustees until the happening of a certain event. More common forms of Inter Vivos Trusts are Discretionary Trusts in which the Trustees are authorised to use their discretion in determining how the benefits flowing from the Trust are to be distributed amongst beneficiaries. In these types of Trusts, the vesting of benefits or assets in beneficiaries is delayed until the exercise of such discretion by the Trustees.

Testamentary trust

Testamentary Trusts are commonly known as a Will Trusts. These types of Trust are created in terms of the Will of a deceased person. Will Trusts cannot be registered with the Master of the High Court during the lifetime of the Testator (the person making the will), as they do not come into existence until the death of the Testator. Set up and administration charges pertaining to the Will Trust are therefore postponed until the death of the Testator, when the Will Trust comes into existence. Will Trusts are usually incorporated in Estate Planning where a Testator wishes to protect certain assets in his or her Estate for the benefit of certain beneficiaries, or to limit beneficiaries’ personal administration and management of certain assets, or as a protection against the beneficiaries themselves. The terms of a Will Trust are typically not contained in such detail as they are in an Inter Vivos Trust where the Trust Deed may run into 25 pages or more. A practice is sometimes adopted to attach a full Trust Deed to a Will, rather than to incorporate the usually shorter provisions pertaining to Will Trusts in the body of the Will.

In the past, terms and conditions pertaining to Will Trusts, were often very poorly described in Wills, and it is now practise to include wide terms, conditions, and powers of Trustees in Will Trusts, which makes them more effective and practical.