Inter-Vivos Trusts and Testamentary Trusts

Much ignorance exists regarding the use of trusts during bequests. This article will endeavour to shed some light on this important issue.

An Inter-Vivos Trust is also known as a living or family trust as it is set up during your lifetime. A trust is the ideal long term structure with which to protect assets from generation to generation while it effects a saving in terms of Estate duty. Estate duty is the levy payable on all your assets upon your death.

When assets are bought through a Trust or transferred to a Trust capital growth takes place within the Trust which is excluded from your estate. This means that the assets within your estate can grow within the Trust without causing higher Estate duty for your estate.

It is recommended that you transfer growth assets to a Trust by selling or donating them to the Trust. The value of these assets sold to the Trust will then be owed to you (or your estate) by the Trust in the form of a loan account. The value of the loan account can be decreased successfully by R100 000 per year by paying the annual exempt amount of Donations Tax to the Trust. The Trust will then pay back the amount of the donation to you in partial redemption of the loan account owed to you.

Another big advantage of an Inter-Vivos Trust is that it offers protection in case of summons because the assets in the Trust are excluded from such claims. The biggest drawback of a Trust is the fact that full control of your assets is lost. As original owner you now become a co-trustee and possibly one of the beneficiaries of the Trust, but the co-trustees also have a say regarding the assets which had previously been controlled and managed only by you.

A Testamentary Trust differs from an Inter-Vivos Trust in that it is set up according to someone’s will and would therefore only be activated once that person dies. The main aim of a Testamentary Trust is to protect the interests of the beneficiaries (who are often minors).

The Trustees of the Testamentary Trust gain control of the assets and manage and administrate the assets in terms of the stipulations of the Testamentary Trust to the advantage and in the best interest of the beneficiaries.

We recommend that the person(s) who is/are named as Guardian(s) of minors be at least one of the Trustees of the Testamentary Trust.

Testamentary Trusts are usually terminated as soon as the trust beneficiary reaches the age as dictated in terms of the will, as opposed to Inter-Vivos Trusts which can last for indefinite periods. Should you decide to set up a Trust or include it in your will, it would be wise to consult a lawyer to avoid possible pitfalls.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

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