Understanding Revocable Living Trusts to Maximise its Benefits in South Africa

While revocable living trusts are popular for their flexibility and benefits in estate planning, they are not without drawbacks. Understanding the potential disadvantages is essential to ensure that this tool aligns with your financial and estate planning goals. Below, we explore the key challenges associated with revocable living trusts.

1. No Tax Benefits During Lifetime

One of the primary misconceptions about revocable living trusts is that they provide tax benefits during the founder’s lifetime. However, this is not the case:

  • Since the trust is revocable, the founder retains control over the assets and is therefore subject to personal income taxes on any income generated by the trust.
  • Assets in a revocable living trust are included in the founder’s estate for estate tax purposes.

2. Costs of Setup and Maintenance

Establishing a revocable living trust can be more expensive than creating a simple will. Costs may include:

  • Legal fees for drafting the trust deed.
  • Administrative costs associated with transferring assets into the trust.
  • Ongoing expenses for managing and maintaining the trust, such as accounting or trustee fees.

For smaller estates, these costs may outweigh the benefits.

3. Complexity in Asset Management

Managing assets within a revocable living trust can be more complex than managing them outright. Challenges include:

  • Titling Assets: All assets intended to be part of the trust must be retitled in the trust’s name. This process can be time-consuming and may require additional documentation.
  • Overlooking Assets: If the founder fails to transfer certain assets into the trust, those assets may still need to go through probate, undermining one of the trust’s main advantages.

4. Lack of Creditor Protection

A revocable living trust does not shield assets from creditors during the founder’s lifetime. Because the founder retains control over the trust, creditors can access the assets to settle outstanding debts.

5. Limited Privacy Advantages in South Africa

While revocable living trusts are often promoted as a means to maintain privacy, this benefit is more pronounced in jurisdictions where probate proceedings are public. In South Africa, probate is not typically as public, reducing the privacy advantage of a trust.

6. Potential for Mismanagement

If the appointed trustees lack experience or fail to act in the best interests of the beneficiaries, the trust could be mismanaged. Additionally:

  • The founder’s oversight might be limited if they are incapacitated, leaving the trust vulnerable to poor decision-making by the trustees.

7. No Automatic Protection Against Estate Duty

Assets in a revocable living trust are not excluded from the founder’s estate for the purposes of estate duty. Upon the founder’s death, the trust becomes irrevocable, and the assets are subject to estate taxes like any other property.

While revocable living trusts offer flexibility and convenience, they come with limitations that must be carefully considered. Factors such as cost, complexity, and lack of creditor protection can outweigh the benefits for some individuals. Consulting with an experienced trust attorney is crucial to determine whether a revocable living trust aligns with your estate planning objectives.

At Burger Huyser Attorneys, we specialise in estate planning and trust law. Our team can help you assess the suitability of a revocable living trust and explore alternative strategies to achieve your goals. Contact us today for personalised advice.

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