Setting Up a Trust: What You Need to Know

There are a variety of reasons why a trust might be the right fit for your wealth management needs. Perhaps you’ve accumulated substantial assets at home and abroad and need a suitable structure to house them. Or you want stronger protection for your assets. Maybe you find the legacy planning benefits appealing? If you tick any of these boxes, then a trust might be the answer, but there are things you need to know to make an informed decision.  

Setting up a trust isn’t for everyone, so the first port of call on this journey is to consult a professional about the various structures and options on the table, in order to find the right fit. If a trust comes out strongly as the best solution, then the process begins: drawing up a trust deed, determining the type of trust, naming the trustees and determining their powers, and nominating beneficiaries.  

There are also a number of types of trusts which must be considered, from ownership trusts (where the founder transfers assets into the structure), to curatorship trusts (established to care for a beneficiary unable to do so themselves), to bewind trusts (where the beneficiaries have ownership but trustees retain control). These can be formed inter vivos, or during the lifetime of the founder, or upon death, known as a testamentary trust.  

For the benefits of wealth preservation, an inter vivos offshore trust is a popular option. There are a number of reasons why this is the case, not least of which are the tax and wealth transfer benefits.  

Anthony Palmer, Group Commercial Director at Carrick Wealth, adds that capital growth is another plus. “In the case of an offshore trust, any growth that stays in the trust and is not distributed remains tax free and grows tax free and is off your balance sheet for estate duty purposes. So, if you put R10 million into a trust, and when you die it is worth R20 million, then you are only taxed on the initial R10 million for estate duty purposes,” he says. 

This is because a trust is its own living entity, explains Palmer. “So, it grows outside and separate from your balance sheet.” 

An issue of control 

These advantages are in place because of the independent nature of a trust. Effectively, the founder has handed over control of the trust and the assets contained therein to the nominated trustees, who are mandated to look after the assets for the benefit of the beneficiaries. This means that the founder is no longer calling the shots and controlling the assets. For many wealthy individuals this is a seminal change and one what must be carefully considered before setting up a trust.  

Palmer warns that tax authorities across Africa will clamp down if they regard the founder as exercising control over the investments and blurring the line between themselves as an individual and the trust as a separate entity. “This applies in particular with local South African trusts,” he explains, making it essential to pay due consideration to the trustees and their independence. 

“The process has to be managed properly,” stresses Palmer. “You need independent trustees, you have to keep proper records and keep track of the distributions.” Failure to do this can result in the authorities looking through the trust and taxing the parties in their personal capacity.  

Advantages for Africa’s wealthy 

Despite all the logistics and technical requirements, there are real benefits to establishing a trust, in particular for Africa’s wealthy individuals.  

“From the African context, trusts are a very good mechanism to preserve wealth,” says Palmer. This can often mean protecting assets from repatriation efforts, as was the case in Nigeria and Kenya in recent years. “If your assets are sitting in a trust then they are separate from the individual who established the trust and they fall outside of these requirements.” 

From a succession planning perspective there are also advantages to be had. “Many of our wealthy African clients prefer to hold their wealth in hard currency, but on death this can be convoluted if this wealth is not protected in an appropriate structure,” says Palmer.  

Be it for the protection offered or the ability to seamlessly transfer wealth to the next generation, trusts have an important role to play in the wealth management process. “They are a pretty simple and cost-effective way of getting your money offshore, in hard currency, and protecting it from attempts by governments to force funds to be repatriated. Plus, it’s an effective way of making sure that, when you die, the right beneficiaries inherit.”