Disadvantages of a Family Trust in South Africa

A family trust in South Africa is governed by the Trust Property Control Act 57 of 1988 and creates a separate legal entity — with all the costs that follow: drafting the trust deed, registering it with the Master of the High Court, ongoing administration by trustees, and the risk that the trustees’ duties and tax attribution rules leave founders worse off than they expected. The Income Tax Act 58 of 1962 (section 7) can attribute trust income back to the founder or a connected person where the trust arrangement is not at arm’s length or income is accumulated for a beneficiary who has not yet received it, defeating the asset-protection rationale for many structures that are not set up carefully. Trustees who fail to perform their duties can be held personally liable under the Trust Property Control Act, and a trust that no longer serves its purpose has to be wound up — a separate cost. Family trusts remain a useful estate-planning tool, but the disadvantages deserve close inspection before any founder commits.

What a Family Trust Actually Is in South African Law

A family trust is a separate legal entity created by a founder (also called the settlor) on terms set out in a trust deed, holding assets administered by trustees for the benefit of identified beneficiaries. The Trust Property Control Act 57 of 1988 is the primary statute: it sets out the Master’s registration regime, the trustees’ duties, and the personal-liability framework. Two broad categories matter for the disadvantages that follow:

• Bewind trusts — trustees hold assets for beneficiaries who retain a vested interest. Common in estate-planning where, for example, a parent settles a trust for a minor child and the child remains the owner in equity.
• Discretionary trusts — trustees have discretion over both capital and income, deciding what (if anything) to pay to which beneficiary and when. This is the more common family-trust structure but also the more vulnerable to section 7 attribution risk.

Each category carries different disadvantages worth understanding before choosing between them.

Set-Up Costs and Timing

The first cost to plan for is the drafting of a tailored trust deed. A deed adapted from a template is cheaper upfront, but the cheapest drafting rarely produces the most useful document — a poorly-drafted deed tends to cost more in tax and litigation than it saved at formation.

Cost Line	What Drives It
Trust deed drafting	Complexity of family circumstances, asset mix, and whether the deed is tailored or adapted from a template
Master of the High Court registration	Statutory requirement before the trust can hold immovable property or earn income — without it the trust does not legally exist in practice
Conveyancing costs (if property is transferred in)	Transfer duty to SARS, conveyancer fees, and a CGT event on disposal by the founder into the trust
SARS income-tax registration (ITF registration)	Trustees must register the trust as a taxpayer before any income is received
Trust bank account	Opening formalities and FICA requirements add calendar time before the trust can operate

The trust does not become functional overnight. Registration with the Master, ITF registration with SARS, and the opening of a trust bank account each add steps and calendar time before the trust can actually operate.

Ongoing Administration Costs

Once the trust is up and running, the costs do not stop. The trust has to keep proper books and records, file an income tax return (the IT3TR return), and lodge annual trustee resolutions — this is administrative work, not optional.

• Trustee fees — trustees typically charge an annual fee (sometimes nominal, sometimes meaningful) for performing their duties.
• Professional fees — accountant, tax practitioner, and legal advisor fees are recurring rather than once-off.
• Property-related costs — if the trust owns immovable property, separate bond, insurance, rates, and body-corporate arrangements must be administered in the trust’s name.
• Beneficial-ownership filings — trustees are required to lodge and update beneficial-ownership information with the Master per the Trust Property Control Act, as administered by the Department of Justice and Constitutional Development.

Plan the cost of the trust’s ongoing compliance and annual filings into the decision — an unmaintained trust is a liability.

Tax Disadvantages and Attribution Risk

This is where many family trusts disappoint their founders.

The headline rule: section 7 of the Income Tax Act 58 of 1962 contains attribution rules that can tax trust income back in the hands of the founder, a spouse, or a minor child of the founder where the trust is not at arm’s length, income is accumulated for a beneficiary, or a loan is made to a founder or connected person on non-commercial terms.

Section 7’s anti-avoidance logic has been the source of most of the binding litigation against trusts in the last decade — and is the reason many poorly-drafted family trusts fail to deliver the tax outcome the founder actually wanted.

Tax Risk	How It Bites
Section 7 attribution	Trust income can be taxed back in the hands of the founder, spouse, or minor child — defeating the intended tax outcome
Estate duty on trust assets	The Estate Duty Act 45 of 1955 treats certain trust-property situations as deemed dispositions by the deceased; estate duty is levied at 20% on the first R30 million of dutiable value (with the R3.5 million abatement where applicable)
Loss of natural-person CGT exemptions	The annual R40,000 capital-gains exclusion and the primary-residence exclusion available to natural persons do not generally pass through to a family trust — once property is transferred in, those exemptions stop being available to that asset
Flat trust tax rate	Trusts (other than special trusts) are taxed at a flat rate on retained income — materially higher than the marginal rates available to natural persons, which makes accumulation strategies expensive if section 7 does not already attribute the income back

Trustee Duties and Personal Liability

The Trust Property Control Act imposes personal liability on trustees who fail to perform their duties. Section 9(1) requires a trustee to act with the care, diligence and skill reasonably expected of a person managing such affairs — and a breach of that standard is not just a contractual issue between trustees and beneficiaries.

• Joint decision-making — trustees must generally act jointly; unilateral action can expose the acting trustee personally.
• Conflicts of interest — trustees must avoid situations where their personal interests conflict with those of the beneficiaries.
• Record-keeping — proper books and records must be kept and made available for inspection.
• Beneficiaries’ best interests — trustees must act in the beneficiaries’ best interests, not the founder’s, once the trust has been established.

Trustees who act negligently, who alienate trust property without authority, or who fail to lodge the required security with the Master can be held personally liable to the trust, to beneficiaries, or to creditors. The Master can remove a trustee who has been sequestrated, who has been convicted of certain offences, or who fails to perform their duties — and replacement trustees must then be appointed and registered. Founders are often asked to act as trustees themselves; this brings fiduciary duties and personal-liability exposure, not just a placeholder role.

Asset Protection Limits

A family trust does protect assets from a beneficiary’s creditors in the normal course — that is one of its reasons to exist. But the protection is not absolute. A creditor can “pierce the trust veil” where:

• the trust was set up to defeat creditors (the “fraud-on-creditors” doctrine);
• the trustees are mere nominees of the founder rather than independent decision-makers; or
• the trustee’s independence has been compromised by the founder’s retained control.

Section 21 of the Insolvency Act 24 of 1936 and case law in divorce contexts (notably the “alter ego” line of cases) have progressively narrowed the practical reach of family-trust asset protection where the founder retained too much control. Founders who transfer assets into a family trust while already indebted, or in anticipation of a divorce, expose themselves to a risk that the transfer is set aside. This is the scenario the courts consistently undo.

Loss of Direct Control

Once assets are in a family trust, the founder no longer owns them directly — the trustees (often including the founder, but acting in a fiduciary capacity) administer them. A beneficiary with a vested interest in income or capital cannot be left without in the bewind-trust context: their interest may already have vested, and the founder’s wishes expressed at formation bind the trustees.

If the founder’s relationship with a co-trustee sours, or the trust deed locks in terms that no longer fit the family’s situation, amending the trust deed requires the agreement of all trustees (and in some cases the consent of the beneficiaries) — not the founder alone. A trust deed that does not anticipate this scenario creates its own problems.

The Cost and Trouble of Closing the Trust

A trust that no longer serves its purpose must be wound up. That involves distribution of trust assets back to founders or beneficiaries, final SARS deregistration, and either a deregistration with the Master or a wind-up procedure under the trust deed.

Cancellation triggers its own tax and duty consequences: distributions are taxed in the hands of beneficiaries under the Income Tax Act, and estate-duty exposure may again arise on the value transferred out. A trust without purpose still has to be administered (returns filed, trustees in place) until it is properly wound up — an abandoned trust is a liability, not a closed one.

Practical Considerations Before Setting One Up

• Have the trust deed drafted to your specific family circumstances — not adapted from a template after the fact.
• Confirm the structure still gives the intended outcome after tax, especially given section 7 attribution risk and the loss of the natural-person CGT exemptions.
• Consider who will act as trustee — independent trustees reduce both the personal-liability risk and the “alter ego” argument if the trust is later challenged.
• Plan the cost of the trust’s ongoing compliance and annual filings into the decision — an unmaintained trust is a liability.
• Review the trust deed every few years with your attorney to ensure it still reflects the family structure and estate plan.

If you are weighing up whether a family trust is the right structure for your circumstances — or reviewing an existing trust that may no longer suit — Burger Huyser Attorneys’ Trusts and Wills & Estates teams can help you work through the legal and tax considerations outlined above. The firm handles trust formation, restructuring, and cancellation from its Linden head office (49 First Avenue, Linden, Randburg, 011 888 0246) and across its Gauteng branches. Reach the head office on 011 888 0246 (after-hours 061 516 6878) to book an initial consultation; the firm will flag any section 7 attribution risk or estate-duty exposure specific to your trust deed before any decision is made.

Frequently Asked Questions

What does a family trust in South Africa cost to set up?

Set-up costs depend on whether the trust deed is drafted from a tailored brief or adapted from a template, whether the trust will hold immovable property (which adds conveyancing, transfer duty, and CGT exposure on disposal), and what professional fees are charged for trustees, accountants, and registration with the Master of the High Court. The cheapest line item is rarely the foundation; a poorly-drafted trust deed tends to cost more in tax and litigation than it saved at formation. Confirm current pricing with the attorney drafting the deed; figures vary by complexity and asset mix.

Does putting a property in a family trust protect it from creditors?

Generally yes — the trust is a separate legal entity and its assets are not the founder’s personal property — but the protection is not absolute. A court can pierce the trust veil where the trust was set up to defeat creditors, where the trustee is a mere nominee of the founder, or where the trust was underfunded at the time of the transfer. Section 21 of the Insolvency Act and a line of divorce case law have narrowed the practical reach of family-trust asset protection where the founder retained too much control.

Can the family trust be used to avoid estate duty?

Estate duty is still in play. The Estate Duty Act 45 of 1955 treats certain trust-property situations as deemed dispositions by the deceased at 20% (with the R3.5 million abatement where applicable), and SARS has increasingly challenged arrangements where little real economic substance supported the trust. A trust can reduce — not eliminate — estate duty exposure, and only where the trust was truly set up and operated at arm’s length from the founder.

Can the founder be a trustee?

Yes, and often is. But acting as trustee means acting in a fiduciary capacity for the beneficiaries — not as the owner. The Trust Property Control Act imposes personal liability on trustees who fail to perform their duties, including joint decision-making, record-keeping, and the avoidance of conflicts of interest. Founders often appoint at least one independent trustee alongside themselves to reduce both the personal-liability risk and the risk that the trust is later characterised as the founder’s alter ego.

What happens if the founder and trustees fall out?

A founder who is also the trustee has the duties of a trustee, and cannot simply direct the other trustees. If a co-trustee becomes uncooperative, the founder can approach the Master for the appointment of a replacement under the Trust Property Control Act — and, where the trust deed allows, an internal replacement procedure can also be invoked. In the worst case, the trust can be wound up and the assets distributed in terms of the trust deed; a deed that does not anticipate this scenario creates its own problems.

When is a family trust the wrong structure?

When the founder’s only goal is to defeat a known creditor, an impending divorce, or a one-off tax bill — these are the scenarios the courts consistently set aside. A family trust works where there is a genuine ongoing estate-planning purpose (e.g. protecting assets for minors, providing for a disabled beneficiary, or holding business interests across generations) and where the founder is prepared to bear the set-up and ongoing administrative cost of the structure. It is the wrong structure if the cost of compliance outweighs the benefit or the founder is unwilling to accept loss of direct control.