Last time round we had a very basic look at Trusts and this time I would like to delve a bit deeper into Living Trusts.
Just to get on track again and get the juices flowing:
This is how trusts work
A trust is an agreement between the owner of assets and the trustees of the trust that will manage the assets with the necessary care to the benefit of the trust beneficiaries. It is an effective and flexible way of making sure that the assets remain in safekeeping and are managed objectively and controlled in the beneficiaries’ best interests by the appointed trustees.
Types of beneficiaries
There are basically two types of beneficiaries in a trust. Firstly the Income beneficiaries (those who are entitled to income generated by the trust) and secondly Capital beneficiaries (those who are entitled to the capital assets). It is possible to be an Income beneficiary and a Trust beneficiary at the same time.
Trustees can also be Beneficiaries while serving as Trustees and can have many entitlements depending on the type of Trust that has been set up.
A living trust can take several forms:
- Family trust
A trust that comes into being through an agreement between the founder and the trustees. Assets are sold or donated (there could be donation tax implications) to the trust and a loan account (debt) is created. The trust may obtain other assets by an inheritance or purchasing of additional assets.
- Charitable trust
A charitable trust may be classified as non-taxable in terms of the Income Tax Act. Capital loans are made to a trust with the trust structured so that it pays no income tax. The trustees can then make donations to charities, schools, and churches, on behalf of the Trust and according to the wishes stipulated. Large donations can be made because there is no income tax applicable. - Umbrella trust
This is a trust linked to a pension, provident, retirement annuity or preservation fund as well as group schemes. The trustees of the fund/scheme obtain additional options to enable them to transfer the death benefits to the trust for management to the benefit of the beneficiaries, in specific cases. - Guardian’s trust
These trusts are created as an alternative for monies due to minors that must, under certain circumstances, be paid into the Guardians’ Fund of the Master of the Supreme Court. This applies to payouts from policies and cash inheritances for which no provision has been made with trusts. This trust is authorised to receive, and to manage to their advantage, any benefits accruing to minors from the Guardian’s Fund. - Special trusts
These types of trusts are taxed at the same rate as a natural person and may only be created to benefit a person suffering from serious mental illness as per the Mental Illness Act, Nr 18 of 1973, or for someone that suffers from serious physical deformity. Testamentary trusts may in certain cases also be classified as a special trust. These Trusts must benefit any living family member, of whom the youngest turns 21 in a tax year. - Discretionary Trusts
From a Property Investment point of view these are probably the ideal Trusts to have which can assist you to benefit from tax and the safekeeping of your assets.
And just when you thought it was safe to relax…..
From Wikipedia, the free encyclopaedia - Inter vivos
Inter vivos (Latin, between the living) is a legal term referring to a transfer or gift made during one’s lifetime, as opposed to a testamentary transfer (a gift that takes effect on death).
The term is often used to describe a trust established during one’s lifetime, i.e., an Inter vivos trust as opposed to a Testamentary trust which is established on one’s death, usually as part of a will. An Inter vivos trust is often used synonymously with the more common term Living trust, but an Inter vivos trust, by definition, includes both revocable and irrevocable trust, whereas Living trusts typically refer only to revocable trusts.
Now that we seem to be on the same wavelength I think it’s appropriate to say that we will get into what Trusts could mean to you in Property Investing next time round in Part 3.
Time for my nap – “Trust” you have a wonderful day.
