Know the Possible Drawbacks When Setting Up a Trust
When it comes to managing and safeguarding assets for future generations, many individuals in South Africa consider setting up a trust. A trust is a legal arrangement in which a trustee holds assets on behalf of beneficiaries. While trusts offer significant benefits—such as asset protection, tax efficiency, and estate planning advantages—they are not without their drawbacks.
Disadvantage of a Trust: Complexity and Costs
The most prominent disadvantage of setting up a trust is the complexity and cost associated with its establishment and maintenance. Here are the main factors that contribute to this challenge:
- Initial Setup Costs: Establishing a trust involves legal fees, registration costs, and professional advice from an attorney or trust specialist. In South Africa, a trust must be formally registered with the Master of the High Court, which involves paperwork and costs. This can make it an expensive process, especially for individuals with relatively simple estates who may not need the full benefits of a trust.
- Ongoing Administration Fees: Trusts require ongoing management. Trustees, who are responsible for ensuring the proper administration of the trust, may charge fees for their services. Additionally, if there are multiple beneficiaries, the trust may need regular accounting, tax filings, and legal consultations. These costs can accumulate, eroding the potential benefits of having a trust.
- Complex Compliance Requirements: Trusts in South Africa are subject to strict legal and regulatory requirements, and failure to comply with these rules can result in penalties. This means that trustees and beneficiaries must ensure the trust is managed correctly to avoid legal complications, which can be burdensome for some individuals.
Other Disadvantages of a Trust in South Africa
In addition to the general complexities mentioned above, there are several specific disadvantages to consider when establishing a trust in South Africa:
- Capital Gains Tax (CGT) and Income Tax: One of the biggest misconceptions about trusts is that they offer a straightforward way to reduce tax liabilities. However, trusts in South Africa are subject to capital gains tax and income tax. The trust itself may be taxed at a higher rate than individuals, which can reduce the financial benefits. For example, the trust is taxed at a flat rate of 45% on any income above R1.73 million (2024/2025 tax year), which is much higher than the rates for individuals.
- Loss of Control: Once a trust is established, the assets transferred to the trust are no longer legally owned by the individual. This means that the person who set up the trust (the settlor) relinquishes control over the assets and must trust the appointed trustees to manage them in the best interests of the beneficiaries. For some individuals, this loss of control can be uncomfortable, particularly if they are accustomed to managing their own affairs.
- Trustees’ Fiduciary Duties: Trustees have a fiduciary duty to act in the best interest of the beneficiaries. While this ensures that the trust is properly managed, it also creates risks if a trustee fails in their duties or if there are disputes between trustees and beneficiaries. Legal challenges to the trust can lead to additional costs and complications.
- Perceived Lack of Flexibility: Trusts may not offer the flexibility that some individuals desire in managing their assets. Once assets are placed into a trust, the terms of the trust deed govern how the assets are used and distributed. If the trust deed is not carefully drafted, it may be difficult to amend the trust later if circumstances change.
Reasons a Trust Might Not be the Right Fit for You
Despite the advantages of trusts in terms of asset protection and estate planning, there are several reasons why some individuals may decide against establishing one:
- Simple Estate Structure: For individuals with a straightforward estate and no complex needs regarding wealth distribution or protection, a trust may not be necessary. If your estate can be easily managed through a will and does not involve significant risks, such as business assets or significant wealth, a trust might be an unnecessary complication.
- High Costs Relative to Estate Size: For individuals with smaller estates, the cost of establishing and maintaining a trust might outweigh the benefits. If the estate is unlikely to face estate duty or if asset protection is not a concern, it may not make financial sense to set up a trust.
- Potential for Family Conflict: A poorly managed or poorly drafted trust can lead to family disputes over the distribution of assets. In some cases, beneficiaries may feel that they are unfairly treated, especially if they have differing expectations of how the assets should be managed. These disputes can lead to long-lasting tension and legal battles, which might be avoided with simpler estate planning methods.
- Time and Effort: Setting up a trust requires careful planning, and maintaining it demands ongoing attention. If an individual is unwilling or unable to commit to the time and effort necessary to ensure the trust is properly managed, it may be better to explore alternative estate planning strategies.
While trusts offer many advantages, such as asset protection and tax planning benefits, they also come with significant disadvantages, including complexity, ongoing costs, and potential loss of control. For South African individuals, understanding the full implications of a trust is essential before committing to this estate planning tool.
If you are considering setting up a trust, it is crucial to consult with a legal or financial professional who can provide guidance tailored to your specific circumstances. At Burger Huyser Attorneys, we can help you weigh the pros and cons of a trust, ensuring that your estate planning is well-suited to your needs and goals. Contact us today to discuss how we can help you create a plan that secures your legacy while minimising the potential downsides of a trust.
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
