Protect your legacy: family trusts under the spotlight
Fiduciary and Tax / 2017.07.19

Protect your legacy: family trusts under the spotlight

Marteen Michau Head of Fiduciary and Tax

Wealthy parents are often concerned about the preservation of their hard-earned family fortunes by their children, and rightly so: research has shown that around 70% of young heirs end up failing as custodians or stewards of the family wealth, squandering it within five years of inheritance. We set out the reasons for this in an earlier article. Here, we recommend one way of protecting your legacy for generations to come: establishing a family trust.

A discretionary trust, founded by one of the family members, can play a vital role in protecting the family legacy in line with the overall family plan and long-term objectives. The trust deed should describe these objectives as well as the role the trust will play in achieving them.

The family members can be the nominated beneficiaries, including the second and subsequent generations. The founder can appoint trustees who know the family dynamics and the individual family members, including their preferences (and even vices).

Alongside these trustees, people can be appointed from the team of family advisers, which usually include an accountant, family lawyer, portfolio manager, wealth manager, fiduciary specialist and tax adviser. They can ensure the family plan is executed over generations in line with the family’s long-term objectives.

Trustees to represent the next generation, who can be one or more of the founder’s children, can be named in the founder’s will, or in the trust deed. The team of family advisers should ensure the children receive trustee training and understand the nature and workings of a discretionary trust. The advantages of establishing a family trust include:

  • The family wealth will be vested in the trust and will no longer belong to the founder.
  • The trust assets won’t form part of the founder’s estate for the purposes of estate duty and capital gains tax, although the family should seek expert advice on the mechanics of transferring assets into a trust as well as the potential tax consequences.
  • The trust assets won’t be bequeathed to individual family members to do with as they wish – no single beneficiary has any right to claim a share of the family assets vesting in the trust, and can therefore not squander it.
  • The Board of Trustees will be able to look after the welfare of subsequent generations by using trust income and capital to their benefit – including for the costs of education, travel and setting up a business.

It’s important to note that the founder of the trust can leave a letter to the trustees expressing his or her wishes in more detail regarding looking after the general welfare of the trust beneficiaries. This could include buying a beneficiary a small car when he or she turns 18, and providing funding for private school education and tertiary education up to a certain level. These wishes aren’t legally binding on the trustees, but will be considered by them.

If there is already a family trust in place, the team of advisers should ascertain whether it will serve the long-term family objectives and if so, whether it’s being managed correctly. If necessary, the team can regularise the management and administration of the trust to ensure the trust assets are protected.

Educational and charitable trusts

A trust can also be set up as part of a family plan to provide exclusively for the education of next generations. Funds can be set aside in the trust for this purpose, with guidelines in the trust deed and in a letter of wishes as to how they should be applied.

If a family donates to charities on a regular basis, the establishment of a charitable trust should be considered, into which donations can be channelled from both within and outside the family. A charitable trust can obtain tax exemption if its objectives are aligned with one or more qualifying listed public benefit activities. This could mean donations to the trust won’t be subject to tax, and that donations could be tax deductible in the hands of the donors, subject to certain limits.

The team of family advisers should regularly review trusts set up for any of the purposes described above to ensure they continue to serve the long-term plan, remain up to date, and comply with changes in legislation and the regulatory environment.

If you need assistance with any of the above, including training for the next generation, contact Marteen Michau at marteenm@privatewealth.sanlam.co.za

For more information on the hot topic of generational wealth, click here to view our ‘Family Fortune’ web series in which the children of two families are exposed to their parents’ hard-earned fortunes in real time – see just how easy it is to lose it all. You can also enter our ‘Family Fortune vault’ and experience the future of your own family fortune in an interactive way.

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