Trusts and InsolvencyFrom time to time we tend to receive enquiries regarding Trusts and Insolvency and / or Sequestration of individuals and the advantages of setting up a living trust and the effects of Insolvency / Sequestration of an individual that is also a beneficiary of a trust.
I am Insolvent. Am I allowed to be a beneficiary on a trust?
Yes, you are allowed to be a beneficiary on a Trust but you are not allowed to be a Trustee on a Trust.
What is a Trust and How Can I benefit from it?
A trust is a structure established by the founder through which property is transferred and it is then administered by trustees on behalf of one or more beneficiaries in line with the trust agreement.
Different Trusts in South Africa
There are three sorts of trusts: ownership trusts, bewind trusts, and curatorship trusts. Trusts are most typically described by the manner in which they are formed:
Living (Inter Vivos) Trust:
This is a trust established during the founder's lifetime. In South Africa, there are two forms of living trusts: vested trusts and discretionary trusts. The benefits of the beneficiaries are specified in the trust deed in vested trusts, whereas in discretionary trusts, the trustees have complete discretion over how much each beneficiary receives. A living trust is formed by preparing a trust deed and registering it with the Master of the High Court (together with various specified forms). The trust is activated as soon as it is registered.
Testamentary (Mortis Causa) Trust:
As the name implies, a testamentary trust is one that is specified in the deceased person's will. The will will state that a trust must be established following the death of the testator. Testamentary trusts are typically established to hold assets on behalf of minor children.
Why would you consider setting up a trust whilst you’re still alive?
Asset safeguarding
One of the primary benefits of a living trust is asset protection from creditors. Because the assets held by the trust are not owned by the trustees or beneficiaries, creditors of the trustees or beneficiaries have no claim against the trust.
What if one of the beneficiaries of the trust fall into financial disarray and declare insolvency?
Will the assets in the Trust form part and parcel of the Insolvent Estate?
Two questions, one answer:
Simply put, any assets held in trust are not included in the estate in the event of insolvency.
Is there any Tax Advantages in Setting up a Trust?
There are some tax advantages when dealing with a deceased estate. We do however suggest that you contact a
Professional Tax Practitioner to inform you of the advantages of having a trust.
The following are some of the most significant benefits:
• Because the increase on assets transferred to a trust belongs to the trust, it is not liable to estate duty. Because of the loan account in your estate, the value of the assets as of the date of transfer stays an asset of your estate if you used a loan to the trust.
• A trust never dies. This means that the trust is not liable for estate duty or other taxes or costs like as transfer duty, executor's fees, or conveyancing fees that would otherwise be due by the estate or heirs.
• Trust assets and benefits continue to be paid to beneficiaries even after you die. Because the estate is frozen during the winding up process, assets in the estate may not be freely available to your dependents. This means that your dependents may get an income only after your estate has been settled.
• Asset protection. A beneficiary cannot sell a trust right (unlike shares in a corporation). If a beneficiary becomes bankrupt, the assets in the trust are still protected. Similarly, if you, as the donor or trustee, fall bankrupt, the trust's assets are secured.
• Trust income can be structured in such a way that it is tax efficient. Once again we suggest that you contact a professional tax practitioner to assist you in this regard.
• Creditor protection if the trust beneficiary becomes insolvent. As previously stated, the assets under a living trust are not owned by the trustees or beneficiaries, and hence the creditor has no claim against them.
In Conclusion
When setting up a trust and transferring property, immovable and movable into the trust it will be safeguarded against any claims from creditors of the beneficiaries of the trust, since the immovable and movable assets will not form part of any
individual estate and it is a separate legal entity.
When applying for sequestration, any assets that’s registered in a Trust will be safeguarded from the Insolvent estate of the Beneficiary.
I've made my decision, what's next?
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