A trust is an estate planning tool formed with the intention of benefiting certain parties (beneficiaries). It creates a legal relationship by the founder of the trust and the trust itself, by placing assets under the control of another person(s) who are often referred to as trustees. This is done either during the lifetime of the founder or on the death of the founder
Trusts are very popular and often viewed as the go-to tool when it comes to estate planning. But just how much do we understand about trusts and the various types that are available? This article will explain some of the different trusts that are available and their benefits.
Trusts created while the person who created the trust is alive
This can often be known as an inter-vivos trust. One of the benefits of this is that the person could sell ‘growth assets'(like property) to the trust and avoid having to pay capital gains tax when he or she passes away.
Additionally, the asset would not be taken into account when calculating estate duty on the deceased estate thereby reducing the estate duty payable.
Taxes may apply when initially transferring assets to the trust.
Trusts that are formed on the death of a person
These are often known as mortis causa trust or a testamentary trust. This can be useful on the death of a person in order to -for example- pass assets to their heirs by way of the trust, rather than the heirs becoming the direct owners of the assets.
Other trusts not mentioned that can be formed are ordinary trusts, bewind trusts, discretionary trusts, vesting trusts and more. Each of these have their own unique features and advantages and disadvantages.
One of the biggest things to keep in mind with trusts is that they are taxed at a flat rate of 45% of the trusts taxable income.
Consult your financial adviser or estate planner for advice on the pros and cons of effectively using trusts as an estate planning tool.