When and How to Use an Inter Vivos Trust to Your Advantage
An inter vivos trust, or living trust, is often considered a valuable tool in estate planning and wealth management. However, it is essential to understand that this financial arrangement, like any other, has its limitations and drawbacks. Below, we explore the concept of an inter vivos trust, when it should be used, how it works, and its potential disadvantages.
An inter vivos trust can be particularly useful in the following situations:
- Wealth Protection: If you wish to safeguard assets from personal liabilities or creditors.
- Estate Duty Mitigation: For individuals with significant estates who aim to reduce the estate duty payable upon their death.
- Family Support: To ensure financial provision for dependents or children in a controlled and structured manner.
- Business Succession: To manage the transfer of business assets and ensure continuity.
While the benefits are clear, it’s crucial to also consider the associated disadvantages before proceeding.
What is an Inter Vivos Trust in South Africa?
An inter vivos trust is a legal entity established by a founder during their lifetime. The founder transfers assets into the trust to be managed by trustees for the benefit of beneficiaries. The trust deed—a legal document—outlines the terms, conditions, and management rules of the trust.
In South Africa, inter vivos trusts are commonly used to:
- Protect assets from creditors.
- Reduce estate duty.
- Ensure continuity in asset management.
- Provide financial security for beneficiaries.
How Does an Inter Vivos Trust Work?
- Creation: The founder establishes the trust by drafting a trust deed and transferring assets into the trust.
- Appointment of Trustees: Trustees are appointed to manage the trust’s assets. These trustees can include the founder, family members, or independent professionals.
- Beneficiaries: The trust is created for the benefit of one or more individuals or entities, as outlined in the trust deed.
- Management: The trustees are responsible for managing and distributing the assets according to the terms of the trust deed, ensuring the beneficiaries’ best interests are prioritized.
What Are the Disadvantages of an Inter Vivos Trust?
Despite its advantages, an inter vivos trust is not without its drawbacks. Here are some key disadvantages:
- High Setup Costs:
- Establishing an inter vivos trust requires professional legal advice and the drafting of a trust deed, which can be expensive.
- Ongoing Administration Costs:
- The trust’s administration involves annual financial audits, accounting fees, and trustee fees, which can become costly over time.
- Complexity:
- Managing an inter vivos trust can be complicated, requiring meticulous record-keeping and compliance with South African trust law.
- Loss of Direct Control:
- Once assets are transferred to the trust, the founder no longer has direct ownership or control over them. Trustees must act in accordance with the trust deed, which may not always align with the founder’s future intentions.
- Tax Implications:
- Trusts in South Africa are taxed at a flat rate of 45% on income retained within the trust, which is higher than individual tax rates. This can diminish the overall financial benefits of the trust.
- Potential Mismanagement:
- Trustees hold significant power over the trust’s assets. If trustees act negligently or unethically, it could result in financial losses for the beneficiaries.
- Irrevocability:
- In many cases, an inter vivos trust is difficult to amend or dissolve once established, which could pose challenges if circumstances change.
How To Know If an Inter Vivos Trust is Right for You?
While an inter vivos trust can offer significant benefits, its disadvantages highlight the importance of careful consideration and expert guidance. The decision to create an inter vivos trust should be based on a comprehensive assessment of your financial situation, goals, and the associated costs.
At Burger Huyser Attorneys, we specialise in estate planning and can help you evaluate whether an inter vivos trust is the right solution for you. Contact us today to explore your options and ensure your wealth is managed effectively and responsibly.
An inter vivos trust is a powerful estate planning tool, but it is not without its challenges. By understanding its disadvantages and consulting with experienced legal professionals, you can make an informed decision that aligns with your financial objectives. Burger Huyser Attorneys is here to guide you through this process and help you secure your financial future.
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