According to popular advice it is better to leave your money for your dependants in a trust, but is it always a good idea?
When it comes to estate planning, few decisions are more complex or more personal than whether it is a good idea to establish a family trust.
High-net-worth individuals often grapple with this choice, prompted by advice from financial advisors, legal professionals or well-meaning friends.
While they can serve as powerful estate planning tools, they are not a one-size-fits-all solution.
The key lies in understanding whether their benefits align with long-term financial and familial goals, Stacy Rouchos, managing director of Bannister Trust, an estate and succession planning advisory firm to Hobbs Sinclair, says.
“Family trusts are often promoted as a silver bullet for wealth protection, but the reality is far more nuanced. It can absolutely safeguard generational wealth and provide asset protection, but only if it is properly set up, actively managed and regularly reviewed to adapt to changing financial and legal landscapes.”
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The benefits and the catch
Trusts offer several well-known advantages as they can shield assets from creditors, ensure financial stability for future generations and maintain privacy over your estate.
They may also serve as an effective tool for estate duty reduction, but they come with strings attached.
“Dissolving it is far from straightforward. It can be legally and administratively burdensome. Too often, we meet clients who did not fully understand the long-term commitments involved. Once it is established, unwinding it can be costly and time-consuming.”
Loss of control of a trust and the risk of “sham trusts”
One of the most misunderstood aspects of trust ownership is the required separation of control. According to the Trust Property Control Act, once assets are transferred, the donor must genuinely relinquish control to ensure compliance, Rouchos says.
“Sars is cracking down on sham trusts where founders try to keep one hand on the wheel. If there is no clear separation between the founder and the assets, the trust could be disregarded for tax purposes and income could be taxed in the founder’s hands. That is a costly mistake.”
Rouchos points out that many older trusts have not been reviewed in decades. “If your trust deed still reads like it was drafted on a typewriter in 1987, it is probably time for a compliance audit.”
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The real cost of running a trust
Beyond initial setup fees, Rouchos warns family trusts come with ongoing legal and administrative responsibilities. Under current regulations, you must appoint an independent trustee, someone who manages trusts as part of their day-to-day profession and who must be compensated accordingly.”
She says trustees are also required to:
- Maintain a dedicated bank account
- Submit annual financial statements
- File annual tax returns
- Maintain full compliance with Sars and the Master of the High Court.
“These obligations are not optional and not cheap either. You must budget for annual accounting and trustee fees, and you must stay on top of your compliance. A poorly managed trust can do more harm than good.”
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The reality of tax
Contrary to popular belief, family trusts are not inherently tax-efficient under current South African tax law, Rouchos says. Income retained in a trust is taxed at a steep 45% and capital gains at an effective rate of 36%.
Unlike individuals, trusts do not qualify for personal tax rebates or exemptions, making careful planning essential. “Outdated assumptions from the 1990s still influence many decisions today. They can offer tax planning advantages, but only when structured carefully with the right professional advice.”
How to decide if a trust is right for you
Trusts can be exceptional vehicles for estate planning, but they are not a one-size-fits-all solution, Rouchos points out.
“The right decision should be based on your long-term financial goals, family dynamics and the complexity of your estate. Careful planning and regular reviews are very important to ensure a trust fits your specific needs.
“Many people think of trusts as a once-off transaction, but they are actually living legal structures that require care and maintenance. If you do not have a clear reason to set one up and the commitment to maintain it, you may be better off with a different estate planning route.”
Rouchos’ advice is to do your homework and not go it alone.
“Consulting a qualified estate planning specialist is crucial. They will help you weigh the benefits against the costs, risks and obligations. That is the only way to know if a trust is truly the right fit for your life and legacy.”
