Everything You Need To Know When Setting Up A Family Trust
A family trust is a popular legal structure in South Africa, used to protect assets, ensure wealth preservation, and provide for future generations. While family trusts offer several advantages, such as asset protection and estate planning benefits, they also come with certain drawbacks that potential founders, trustees, and beneficiaries must consider.
1. High Setup and Administration Costs
One of the major disadvantages of a family trust is the cost of establishing and maintaining it.
- Setup Costs: Drafting a trust deed, registering the trust, and appointing professional trustees require upfront legal and administrative expenses. These costs can be significant, particularly if the trust involves complex arrangements or assets.
- Ongoing Administration: A family trust must comply with strict legal and tax regulations. Professional services, such as accountants, attorneys, and financial advisors, are often required to manage the trust, which adds to the ongoing costs.
These expenses can make a family trust an expensive solution for those with smaller estates or limited financial resources.
2. Loss of Personal Control Over Assets
Once assets are transferred into a family trust, they no longer belong to the individual who created the trust (the founder). The assets are legally owned by the trust and managed by the trustees on behalf of the beneficiaries.
This loss of control can be challenging for founders who are accustomed to directly managing their assets. The trust deed governs how assets are managed and distributed, and the trustees must act in the best interests of the beneficiaries, not the founder.
If trustees do not follow the founder’s wishes or mismanage the trust, this can lead to disputes and dissatisfaction among family members.
3. Tax Implications
While family trusts can provide tax advantages in some cases, they are often subject to high tax rates:
- Income Tax: Trusts are taxed at a flat rate of 45% on retained income, which is significantly higher than the progressive tax rates for individuals.
- Capital Gains Tax (CGT): Trusts are subject to a higher effective CGT rate of 36%, compared to the individual rate of 18%.
- Donations Tax: Donations made to the trust may attract donations tax at 20% or 25% for larger donations.
Managing these tax obligations requires careful planning and professional advice, which can increase costs and complexity.
4. Administrative Burden and Compliance
Family trusts must comply with strict legal, regulatory, and tax requirements in South Africa. This includes:
- Filing annual tax returns with the South African Revenue Service (SARS).
- Keeping accurate financial records of the trust’s activities.
- Ensuring trustees act in accordance with the trust deed and legal fiduciary duties.
Failure to meet these compliance obligations can result in penalties, fines, and legal disputes, making the administration of a family trust time-consuming and burdensome.
5. Potential for Family Conflict
Family trusts can sometimes lead to disputes and tensions among family members, especially when there is disagreement over:
- The management of the trust’s assets.
- The distribution of income or capital.
- The appointment or actions of trustees.
Beneficiaries may feel that the trustees are not acting in their best interests, or trustees may face pressure from beneficiaries to make decisions that are not aligned with the trust deed. These conflicts can strain family relationships and, in some cases, lead to costly legal battles.
6. Lack of Flexibility
Once a family trust is established, it can be difficult to make changes to the trust deed or the trust’s operations. The trust is governed by the terms set out in the trust deed, which may not account for changing family dynamics, financial circumstances, or legislative updates.
Additionally, certain actions, such as dissolving the trust or distributing assets, may require court approval or the agreement of all beneficiaries, which can be a lengthy and complicated process.
7. Limited Access to Financing
Assets held in a family trust may be difficult to use as collateral for loans or credit. Banks and financial institutions often hesitate to lend against assets owned by a trust because the legal ownership lies with the trust, not an individual.
This limited access to financing can pose challenges for trustees or beneficiaries who need liquidity or wish to leverage the trust’s assets for investment purposes.
8. Risk of Trustee Mismanagement
The success of a family trust depends heavily on the actions of the trustees, who are responsible for managing the trust’s assets and adhering to the terms of the trust deed.
- Incompetence or Negligence: Trustees who lack the necessary skills or experience may mismanage the trust’s assets, leading to financial losses.
- Conflict of Interest: Trustees with personal interests in the trust’s activities may not act in the best interests of the beneficiaries.
Selecting professional and competent trustees is crucial to mitigate these risks, but professional trustees often charge substantial fees.
At Burger Huyser Attorneys, we understand the complexities of family trusts and can guide you through the decision-making process. Our experienced team will help you weigh the advantages and disadvantages of a family trust, ensuring it aligns with your financial goals and family dynamics. If you’re considering setting up a family trust or need assistance with managing an existing trust, contact Burger Huyser Attorneys today for expert legal advice tailored to your unique circumstances.
Contact Burger Huyser Attorneys, and book a consultation.
To speak to one of our experienced attorneys in South Africa for immediate assistance, contact us on the numbers below:
Randburg call 061 516 6878; Roodepoort call 061 516 0091; Sandton call 064 555 3358;  Pretoria call 064 548 4838;
Centurion call 061 516 7117; Alberton call 061 515 4699; Bedfordview call 061 536 3223
DISCLAIMER: Information provided in this article does not, and is not intended to constitute legal advice. READ MORE
