WHAT IS THE RELATIONSHIP BETWEEN FAMILY TRUSTS AND WILLS?
Introduction
Understanding the intricate relationship between family trusts and wills is crucial for effective estate planning. While both serve as essential tools in managing assets and distributing wealth, they operate differently and offer distinct advantages and disadvantages.
A will, a legally binding document, outlines how your assets will be distributed after your death. It becomes effective only upon your passing, and its provisions must be carried out accordingly. In contrast, a trust is focused on asset and property management and can be active both before and after death. Trusts require funding and ongoing management during your lifetime to ensure they fulfil their intended purpose.
New reporting obligations aim to enhance transparency and accountability, but have also increased administrative burdens for trustees. In brief, the new rules:
- require trusts to establish and record the Beneficial Ownership of a Trust;
- effectively make trustees third-party data providers for SARS.
Compliance is essential to avoid non-compliance.
Let us first consider the advantages and disadvantages of a will and a trust.
Advantages of a Will
- Streamline processes for family and loved ones following death.
- Protect inheritance for heirs of your estate.
- Allocate money or assets to trusts.
- Plan living will in the case of incapacitation or physical deterioration.
- Prepare for coverage of burial costs and necessary taxes.
Advantages of a Family Trust
- Creditor protection – Assets are not owned by the trustees or beneficiaries and the creditor, therefore, has no claim against them.
- Protection against relationship property claims – If your assets are owned by a trust, or are given to your trust on death, your children can continue to benefit from those assets, but the assets do not form part of their personal property, and therefore cannot be subject to claims by your children’s partners.
- Protecting property from or for beneficiaries – You may be reluctant to simply give your assets to your children during your life or on death if you have concerns about their ability to manage their financial affairs. If you give your assets to a family trust, then the trust can provide a vulnerable child with income and/or capital to meet their cash requirements as they arise.
- Protecting assets for future generations from potential tax law changes – Family trusts may provide protection against various forms of tax. For example, R100 000 earned by a trust can be split between five beneficiaries so that they earn R20 000 each. If they earn no other income, they will pay no tax as this amount is below the threshold. This is the so-called split income principle, i.e., income tax is levied against the trust, but income distributed is taxed in the hands of the beneficiary.
Despite these advantages, both wills and trusts come with their own set of challenges:
Disadvantages of a Will
- Possible challenges – Although it’s possible that someone could challenge your will, if you have followed all the proper procedures in its creation, your will and its provisions will likely stand.
- It is public record – A will becomes public record once it is filed for probate, which means anyone can search for it and see its contents.
- May not fully address tax concerns – A will that is not carefully planned out could leave your estate open to paying estate taxes or your beneficiaries to paying hefty inheritance taxes.
Disadvantages of Family Trusts
- Loss of ownership of assets – If you transfer your personal assets to a trust, then the trustees of that trust will control the assets. Although you can retain some control by holding the power to appoint and/or remove trustees, or even by being a trustee yourself, it is important to remember that assets you transfer to the trust are no longer your own. If you continue to treat the assets as your own, any trust could be open to challenge as a sham.
- Additional administration – If you establish a trust, you need to allow for the time and cost involved with meeting the trust’s annual accounting and administrative requirements.
- Cost of formation of the trust and the transfer of assets – There are costs involved with establishing a trust. These will depend on the complexity of your trust and the nature of the assets to be transferred.
- Future law changes – Possible changes to legislation of trust law may remove or effect some of the original objectives for the trust formation.
Wills or Trusts?
Determining whether to establish or maintain a trust alongside a will hinges on several factors, such as family dynamics and individual circumstances. Revisiting the founder’s intentions and the objectives of the trust is essential in making this decision. However, despite the complexities involved, there are clear benefits to opting for a trust over a will when it comes to distributing your estate to beneficiaries.
- Estate duty savings and asset protection: Trusts can potentially save on estate duty and protect inheritances from beneficiaries’ creditors, ensuring that assets remain accessible to beneficiaries without being subject to creditor claims. This preserves family wealth for future generations.
- Preservation of capital for disabled beneficiaries: Trusts provide a reliable means to preserve capital and cover expenses for beneficiaries with disabilities, ensuring their long-term financial security.
- Efficient administration for minor beneficiaries: Trusts can administer assets for minor beneficiaries without court intervention, avoiding delays and costs associated with the Guardians Fund. This allows for smoother management and allocation of assets for the benefit of minors.
- Continuity and perpetual succession: Trusts continue to operate even after the death of the founder, ensuring minimal disruption in benefit enjoyment for beneficiaries. They can span generations, providing continuity in estate planning for the family.
- Protection for surviving spouses with limited financial skills: Trusts safeguard the interests of surviving spouses who may have limited financial expertise, ensuring their financial well-being and security.
- Asset protection and facilitation of divorce settlements: Trusts offer protection against creditors and divorce claims, preserving assets for the maintenance of spouses and children while safeguarding property for their benefit.
- Holding non-subdivisible property: Trusts facilitate the management of non-subdivisible assets, such as agricultural land, by providing for multiple beneficiaries with varying rights of enjoyment and use.
- Receipt of bequests and management of affairs: Trusts can receive bequests and manage affairs on behalf of beneficiaries, ensuring prudent administration of assets, especially for individuals incapable of managing their own affairs due to mental incapacity.
To explore the best estate planning solution for your family, schedule a consultation with the TDP Wills and Estates division by sending an email to: wills@tdpsa.co.za. Our team can provide personalised guidance to secure your family’s financial future.
