When is it appropriate to set up a Trust

Cloud Accounting Advisory with Xero
March 10, 2022
March 22, 2022

When is it appropriate to set up a trust?

A trust and the use thereof is often associated with complex wealth structures and frequently the potential value thereof within a family, wealth or asset structure is misunderstood. A stigma of complexity and intricacies surround trusts; however, it is much simpler than most people think.

A trust is a legal entity founded by a founder by drawing up a trust deed. The trust deed determines how the trust will be utilised and managed by the trustees. The trustees are appointed to manage the assets or to oversee the management of the trust’s assets to the benefit of the beneficiaries. The beneficiaries are the ones that ultimately receive the benefit of the trust and gain from the efficient asset structure created within the legal entity.

A typical “family” trust will be founded by a member of the family who will also serve as trustee alongside his / her spouse and an independent trustee. An independent trustee is often a family friend, financial advisor or professional trust company. Independence is key to avoid that the trust assets are regarded as an extension of the founder and their estate. The beneficiaries will usually be the founder, spouse and their descendants to ensure they and their future generations are able to enjoy the fruits of their labour during their lifetime.

Trusts are very versatile and can assist with and address various needs or preferences within a family structure, be it preserving wealth, estate planning, succession or taking care of the vulnerable.

Financial security for loved ones left behind

Upon the passing of a deceased, the bank accounts of the deceased are frozen and paid to the estate. Only after various legal requirements have been adhered to, may the estate advance money to the family, heirs and / or legatees. This timing delay may place a financial strain on the deceased’s loved ones, especially if the deceased was the sole provider in the family.

A trust with sufficient assets may provide for the financial needs of your loved ones left behind in a time when their focus should be on grieving the loss of a loved one as opposed to worrying about sufficient finances to ensure everyday survival.

Providing security for the next generation

The use of a trust to accumulate assets can, if administered correctly, create generational wealth which may be passed on from generation to generation without creating significant tax events. Assets held by a deceased at the time of their passing attract various taxes as prescribed by the Income Tax Act, Estate Duty Act, etc. These taxes effectively erode the inheritance passed onto the surviving spouse and next generation.

In most instances, this may be used to reduce the creation of significant estate planning issues for those left behind, as assets inherited by heirs in their personal capacity will immediately be included in their estates.

Taking care of those who are not able to take care of themselves 

A trust offers a unique opportunity for families to take care of those who cannot take care of themselves, for example a child with special needs or a parent with a debilitating disease. A trust can ensure that they are taken care of financially if they cannot take care of their finances. Financial security for those in need provides families with peace of mind and the opportunity to focus on the things that really matter.

Protecting the professionals

Protect your family by protecting yourself. Several professions have certain risks, specifically relating to personal liability, in the sense that you are personally liable for damages suffered by others. These professions and their inherent risks may expose the professional to legal claims resulting in their personal assets being placed at risk. This risk may adversely affect their families. The accumulation of assets in a trust mitigates the risk of these assets being exposed to various legal claims and other creditors.

Trusts and the use thereof is a complex topic, and a one-size-fits-all approach does not exist. Consult with an ASL expert to ensure your peace of mind.


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