Here are some recommendations for setting up a family trust.
- access professional advice before considering whether a family trust will benefit your long-term wealth creation and protection goals.
- engage an independent professional (accountant or attorney) as one of the trustees. This way you can avoid the risk of breaking down the firewall between your creditors and the trust assets.
- get the trustees to formally appoint you as the director of the company owned by the trust. That way, you can run the company and you won’t have to acquire trustees’ signatures every time you want to do something.
- ensure that you are on of the trustees and also one of the beneficiaries. You must be a beneficiary as you don’t know what may happen in future.
- keep minutes of all decisions made by the trustees, usually in the form of a resolution. This helps to avoid breaking down the firewall between your creditors and the trust assets. If you don’t keep minutes, you’ll have to submit three nil returns (income tax returns) every year.
- register the trust for tax. Under a trust, the property no longer falls into your personal estate and is thus not subject to inheritance tax. A trust should never earn taxable income.
- donate cash to start the trust; you will have to hold it in a bank account and it will likely not last long.
- allow yourself to be fired by a majority of the trustees. You must be able to reasonably control who the trustees are without putting your own appointment at risk.
- limit your number of beneficiaries to family members (i.e. spouse and children). Always add some others, because if you all happened to be killed in a single accident, for instance, a trust with no other beneficiaries forfeits its assets to the State. When registering a family trust, the Master of the High Court may insist on the appointment of an independent outsider as one of the trustees.
- do anything that would cause the trust to have to pay tax. The income should be earned by a company owned by the trust as the tax rates will be much lower.
- forget to appoint your replacement trustee in your will and also write a letter of wishes to the trustees.
- use your name and/or surname, as this will make it easy for your creditors or SARS to track your trust.
Read more in this related resource: Death and divorce with a trust.