South Africans have had a love-hate relationship with Trusts for the longest time. We love the protection it provides against the wrath of a spouse, the greed of SARS and the persecution of creditors. But we hate the costs and admin associated with it, the loss of control and erosion of the tax benefits we enjoyed in the recent past.
Professionals differ in their approach to its uses and benefits; and to get contradicting professional opinions is the rule rather than the exception. Accounting professionals point out the two-dimensional short-term tax expense of trusts, the financial advisory profession often point out the higher Capital Gains rate and FICA burden a trust creates, whilst estate planners sing the praises of the unique legal nature of a trust which can carry wealth across generations so seamlessly.
To compound the complexity, trusts are used across multiple jurisdictions and as ownership vehicles for assets situated in many countries. Each country further taxes proceeds from trusts differently.
Each voice in these debates carries with it an element of truth, an element of half-truth and an element of exaggeration. Somewhere in between is a bespoke truth relevant to the individual estate planning scenario. Absolute viewpoints tend to be more wrong than right.
What we do know with certainty, is what trusts are and how trusts differ in principle.
What is a trust?
A trust is an arrangement between a person who gives something to someone to own on behalf of a group of people or for a specific cause. In South Africa we explain this transaction in contractual terms and our trusts are also of contractual nature or the product of a will. We recognise a founder who donates or bequeaths something to trustees to hold on behalf of beneficiaries or a cause. We use the law of contract and the law of testation, coupled with several unique principles to understand a trust.
Many offshore countries like Guernsey, Jersey, and Isle of Man (the so-called offshore jurisdictions) have a more pliable legal understanding of trusts. For them for instance, a trust can just be declared to exist by a trustee. In all these examples however, there is a relationship of trust where trustees care for beneficiaries with funds entrusted to them.
The main differences between South African and the typical “Offshore” can be tabulated as follows:
Whichever way one look at trusts, whether it is local trusts or offshore trusts, the benefits of trusts are directly related to the quality of the trustees, their knowledge of the law in which the trust operate, their administrative ability and competence, and above all, their trustworthiness and ethical standards.
Trusts function within a legal scale of grey (as opposed to the black and white environment of the accounting world), which makes it a complicated vehicle to use. Bad things happen in trusts through ignorance of the law, or of the level of ethics and skills required by trustees.
It is advisable to obtain legal assistance to navigate the complexity of a trust to achieve the simplicity in estate planning that lies on the other side of it.