Trust Formation and Trustee Services

Families have been using trusts to preserve and manage their wealth for the benefit of their heirs for centuries. Trusts provided people with a means of protecting their assets and controlling how they are used after they have been given away. Unlike corporate vehicles, the lack of rigid formal requirements for the creation and operation of trusts, and the tremendous flexibility of trust instruments, make them uniquely useful for estate and succession planning.

Although many of the tax benefits that were associated with trusts have been eroded in recent years by anti-avoidance legislation, they still offer great advantages – particularly for individuals who are changing, or planning to change, their domicile, residence or citizenship; those with families resident abroad; those seeking asset protection; and those whose principal motivation is not to avoid taxation but to dispose of their estate on death freely and without recourse to a lengthy and expensive probate procedure.

The use of trusts was introduced in South African law through usage without specific legislative intervention. Currently a trust is defined widely in the South African income tax legislation as meaning any trust fund consisting of cash or other assets that are administered and controlled by a person acting in a fiduciary capacity, where such person is appointed under a deed of trust or by agreement or under the will of a deceased person.

The South African Revenue Service (SARS) has introduced a number of measures over the years, which now results in the income of trusts being taxed at 45%, the highest rate applicable to individuals, although the ‘flow through’ principle remains such that income and gains will flow through to the beneficiaries of a trust for tax purposes.

Using a trust to own the shares of a South African or offshore company can result in significant tax and non-tax related advantages that will accrue both during the lifetime of the trust settlor and upon their death. These advantages can be summarised as follows:

  • Saving on estate duty or inheritance tax – On death, the estate duty/inheritance tax that would normally be assessed on the value of the shares will generally be eradicated.
  • Asset protection – Assets placed into trust are generally beyond the reach of creditors who might arise as a result of financial difficulties, divorce proceedings, litigation etc.
  • Avoidance of probate – A trust provides a means whereby assets can be passed on to the next generation smoothly and securely.

The use of offshore trusts has also been the subject matter of legislative intervention. Essentially income and capital gains are taxable in the hands of a South African resident to the extent that the resident acquires a vested right to the income or capital of a foreign trust in circumstances where the income or capital gains have not previously been subjected to tax in South Africa.

Sovereign has extensive experience in the establishment and administration of trusts and appropriate planning for income tax, capital gains tax and inheritance tax purposes. Our knowledge of the tax legislation relating to trusts and the duties and obligations of trustees enables us to ensure that trusts are properly managed – dealing with annual accounts, filing tax returns and liaising with beneficiaries over distributions. Our international reach also means we have the capacity to advise clients with cross border interests and work with other jurisdictions to administer international trusts and estates.

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Europe Focus January 2019

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Sovereign Trust (Gibraltar) Limited
Tel: +350 200 76173