Is a family trust the best choice for your wealth protection?
Explore the complexities of family trusts in estate planning. Understand the benefits, potential pitfalls, and whether a family trust aligns with your long-term financial goals.
Is a Family Trust the Right Move for You?
When it comes to estate planning, few decisions are more complex—or more personal—than whether 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 trusts 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.
Family trusts are often promoted as a silver bullet for wealth protection, but the reality is far more nuanced. A trust can absolutely safeguard generational wealth and provide asset protection—but only if it's properly set up, actively managed, and regularly reviewed to adapt to changing financial and legal landscapes.
The Benefits—and the Catch
Trusts offer several well-known advantages: they can shield assets from creditors, ensure financial stability for future generations, and maintain privacy over one's estate. They may also serve as an effective tool for estate duty reduction. But they come with strings attached.
Dissolving a trust is far from straightforward—it can be legally and administratively burdensome. Too often, we meet clients who didn't fully understand the long-term commitments involved. Once a trust is established, unwinding it can be costly and time-consuming.
Loss of control & 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 to a trust, the donor must genuinely relinquish control to ensure compliance.
Sars is cracking down on sham trusts—those where founders try to keep one hand on the wheel. If there's 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's a costly mistake.
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's probably time for a compliance audit.
The Real Cost of Running a Trust
Beyond initial setup fees, family trusts come with ongoing legal and administrative responsibilities. Under current regulations, every trust must appoint an independent trustee—someone who manages trusts as part of their day-to-day profession and who must be compensated accordingly.
Trusts 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 aren't optional, and they aren't cheap. You need to budget for annual accounting and trustee fees, and you need to stay on top of your compliance. A poorly managed trust can do more harm than good.
Taxation Realities
Contrary to popular belief, family trusts are not inherently tax-efficient under current South African tax law. 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. Trusts can offer tax planning advantages, but only when structured carefully with the right professional advice.
So, Is a Trust Right for You?
Trusts can be exceptional vehicles for estate planning, but they are not a one-size-fits-all solution. 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 so important to ensure a trust fits one's specific needs.
Many people think of trusts as a once-off transaction, but they're actually living legal structures that require care and maintenance. If you don't 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.
Her advice? Do your homework. And do not go it alone. Consulting a qualified estate planning specialist is crucial. They'll help you weigh the benefits against the costs, risks, and obligations. That's the only way to know if a trust is truly the right fit for your life and legacy.
* Rouchos is a managing director at Bannister Trust and an Estate Planning Consultant at Hobbs Sinclair.
PERSONAL FINANCE
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