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PROTECT YOUR LEGACY:
FAMILY TRUSTS UNDER THE SPOTLIGHT
Fiduciary and Tax Specialist
May 18, 2021
A discretionary trust, founded by one of the family members, can play a vital role in protecting the family legacy in line with the overall family plan and long-term objectives. The trust deed should describe these objectives as well as the role the trust will play in achieving them.
The family members can be the nominated beneficiaries, including the second and subsequent generations and any further trusts created for their benefit. The founder can appoint trustees who know the family dynamics and the individual family members, including their preferences (and even their vices). It is, however, crucial to also appoint an independent trustee with the necessary skill and knowledge to manage trust affairs.
Alongside these trustees, individuals can be appointed from the team of family advisers, which usually include an accountant, family lawyer, portfolio manager, wealth manager, fiduciary specialist and tax adviser. They can ensure that the family plan is executed over generations in line with the family’s long-term objectives, and that everyone involved understands these objectives. Aspects that need to be considered include:
Trustees to represent the next generation, who can be one or more of the founder’s children, can be named in the founder’s will, or in the trust deed. The team of family advisers should ensure the children receive trustee training and understand the nature and workings of a discretionary trust.
Challenges experienced in practice include the second generation wanting their share of the inheritance or ‘pot of gold’ upon the death of the surviving spouse of the first generation, or the spouses of the second generation exerting an influence. This can lead to family friction, which often results in trusts being terminated.
To ensure that the trust will continue into perpetuity and won’t be terminated by the second generation due to family dynamics, the following aspects need to be taken into account:
In helping to address these issues, the trustees play a critical role in ensuring that the trust continues for generations to come.
The advantages of setting up a discretionary trust include the following:
It’s important to note that the founder of the trust can leave a letter to the trustees expressing his or her wishes in more detail regarding looking after the general welfare of the trust beneficiaries. This could include buying a beneficiary a small car when he or she turns 18, and providing funding for private school education and tertiary education up to a certain level. These wishes aren’t legally binding on the trustees, but will be considered by them.
If there is already a family trust in place, the team of advisers should ascertain whether it will serve the long-term family objectives and if so, whether it’s being managed correctly. If necessary, the team can regularise the management and administration of the trust to ensure the trust assets are protected. It’s also important to ensure that the trust deed makes provision for the trustees to create further sub-trusts or to create sub-accounts for the benefit of the trust beneficiaries.
A trust can also be set up as part of a family plan to provide exclusively for the education of next generations. Funds can be set aside in the trust for this purpose, with guidelines in the trust deed and in a letter of wishes as to how they should be applied.
If a family regularly donates to charities, the establishment of a charitable trust should be considered, into which donations can be channelled from both within and outside the family. A charitable trust can obtain tax exemption if its objectives are aligned with one or more qualifying listed public benefit activities. This could mean donations to the trust won’t be subject to tax, and that donations could be tax-deductible in the hands of the donors, subject to certain limits. The team of family advisers should regularly review trusts set up for any of these purposes to ensure they continue to serve the long-term plan, remain up to date, and comply with changes in legislation and the regulatory environment.
Since the investment landscape has changed and more people are investing abroad, it’s important to structure your offshore estate correctly. In terms of South African exchange control regulations, a South African trust is not permitted to hold offshore assets unless it is by way of an asset swap or if special dispensation is granted by the South African Reserve Bank. The same objectives can be achieved for your offshore-based assets by setting up a dry trust (offshore trust) to receive the offshore estate on the death of the testator or testatrix.
By executing an offshore will for your offshore assets and by structuring it in such a way as to leave your offshore estate to the dry trust for the benefit of the trust beneficiaries, you will peg the value of their estates for estate duty purposes and preserve the wealth for the next generation and for generations to follow.
If you need assistance with any of the above, including trustee training for the next generation, contact Christine Bornman at firstname.lastname@example.org.
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