Why you need a trust and how to set one up
09 February 2015, 08:03
Nairobi - Deon Nel, Head of Financial Consulting at Standard Bank says, "A trust is an entity that can help you to protect your assets from creditors, minimise estate duty, finance your children’s education and look after your spouse’s needs after your death.
Trusts are generally more beneficial for people who have built up some wealth or have a number of businesses, and help to preserve wealth for future generations.
It however all depends on the circumstances of an individual and what they would like to achieve, which will then indicate whether a trust is the correct vehicle to use or not."
Mr Nel advises that the following important factors be considered when setting up a trust:
The importance of having a Trust
Having a trust is an important and valuable structure for estate planning and if used wisely, the trustees of the trust can achieve the goals of a person by managing and distributing assets while his alive and after he has passed away.
For an individual who is starting to accumulate assets and has a family they would like to provide for, a trust is an essential element of a financial plan.
Benefits of a Trust
The trust can purchase assets directly from third parties, or an individual may dispose of his existing assets into it.
It also gives you flexibility in terms of how your assets should be looked after and stipulate who gets the income from them and what should happen with the assets when the trust is terminated.
The estate planning benefits of not having to pay estate duty on these trust assets when you die are also worthwhile, and a trust should always be formed with these benefits and the relevant tax rules in mind.
Tax rules can change very quickly and an individual should not set up a trust mainly from a tax point of view.
How to set up a Trust
In order to set up a trust, you need to have a deed nominating trustees who will hold and manage the assets you place in the trust. The trustees ensure that your wishes are carried out with regards to beneficiaries.
In the deed, you define the criteria according to which the trustees must act.
A trust is only as good as the specialist who sets it up. A professional will be upfront and honest with you about your needs.
They should assess your financial situation and make appropriate recommendations. Using the correct experts to set it up will ensure your needs are met for your entire life.
Types of Trusts
The two most commonly known trusts are: Living trusts or "Inter vivos" trusts and Testamentary trusts or "Mortis Causa" trusts.
An Inter vivos trust takes effect during your lifetime. A Testamentary trust provides for your estate after your death. However, you can elect to keep the living trust in place after your death by having such a stipulation in the deed.
This provides uninterrupted asset management and financial protection for your family.
Costs of a Trust
Trusts can be complex and time-consuming to administer. It costs money to set them up and there are generally ongoing legal and accounting fees which are not regulated by legislation.
Different organisations charge different amounts both for the establishment and ongoing management of a trust, so gather all information necessary before setting up a trust.
Legalities with Trusts
All trusts need to be registered with the Master of the High Court. A legal document called a trust deed needs to be registered in terms of the Trust Property Control Act.
The trust deed will specify in detail what the trustees can and can’t do with the assets under their control. Trusts must be set up within the ambit of the law and have legal protection.
No person can act on behalf of a trust before the Master of the High Court has appointed him as a trustee. All such actions will be null and void and cannot be ratified.
Many people believe that a trust can be used to avoid legal responsibilities. For example: if you currently have debt problems, you are able to set up or use a trust to transfer your assets into it in order to avoid paying creditors.
The law will identify this and you will still be responsible for settling your debts. However, you can be proactive and form a trust with the view of protecting your assets from future creditors but this can only be achieved if you have a clear financial record and are managing your finances accordingly.
With the majority of cases the assets of the individual are disposed of to a living trust with the trust owing the individual an amount equal to the selling price.
The amount owing or loan account may still be attached by the creditors of the individual as it forms part of the assets.
You can be a trustee and also a beneficiary of your own trust, but you should not be the only one. It is best for the trust to have two or preferably three trustees.
As long as the trust was set up correctly and the trustees run it for the good of all the beneficiaries, it will protect you from creditors and offer the opportunity to pay less in estate duties when you die.
"Setting up a trust will protect your valuable assets and wealth built up over time. It will also help look after your loved ones after your death and assure peace of mind," concludes Mr Nel.
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