Not to Trust: When a Trust is Not the Best Way to Go

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Trusts are a versatile tool for estate planning, asset protection, and tax efficiency. We have previously written on cases where registering a trust is a good option as well as the many benefits they hold beyond estate planning.

However, while trusts offer numerous advantages in the right circumstances, they are not always the ideal solution for everyone. In some scenarios, establishing a trust can lead to complications, unnecessary costs, or may simply not align with your financial goals.

Therefore, we are ending this short blog series on trusts by providing key reasons why forming a trust might not be the best option for specific individuals or situations.

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1. Costs of setting up and maintaining a trust

Establishing and keeping up a trust is not without cost.

Trusts require:

• Legal assistance to be correctly drafted (depending on the complexity of the trust, this can accrue significant costs)
• Ongoing administration (such as paying trustees, accountants, and financial advisors for their services)
• The submission of tax returns and maintaining detailed financial records (for certain types of trusts), which adds to the administrative burden

For smaller estates or assets, the costs of setting up and maintaining the trust may outweigh the benefits. Moreover, if the primary motivation for creating the trust is to save on taxes, these costs may ultimately negate the potential savings.

2. Loss of control over assets

One of the key features of a trust is that it becomes the legal owner of the assets you place into it. Once assets are transferred into the trust, they are no longer part of your personal estate, and you no longer have direct control over them. The appointed trustees now manage the assets per the trust deed and must make decisions that benefit the beneficiaries, not necessarily you as the founder.

This scenario is ideal in some instances (most notably estate planning). However, the lack of control can be uncomfortable for some, especially if the trustees do not act in alignment with the founder’s intentions. Trusts are thus not the right choice for individuals who prefer retaining full control over their assets.

3. Potential for tax inefficiency

While trusts can offer tax benefits in specific situations, they are not always the most tax-efficient structure. Trusts are subject to high tax rates in South Africa, with income tax on trusts levied at a flat rate of 45%. This is significantly higher than the marginal tax rates for individuals or the tax rate for companies, which makes trusts less appealing for income-generating investments. Additionally, capital gains tax within a trust is taxed at a higher effective rate than for individuals.

For estate planning, a trust can help reduce estate duty, but if your goal is tax efficiency for income or capital gains, other legal entities such as companies or holding structures may be more effective.

4. Legal and administrative complexities

Trusts are governed by strict legal regulations and are subject to ongoing oversight, which can become complex over time. Trustees are legally required to act in the best interest of the beneficiaries and ensure compliance with the trust deed and the Trust Property Control Act. Managing these obligations can become time-consuming and administratively demanding, especially for small families or individuals not accustomed to handling legal matters.

This complexity can be particularly burdensome if the trust is designed for relatively simple goals, such as minor asset protection. In these cases, alternative estate planning tools, such as wills or insurance policies, may offer more straightforward solutions without the legal and administrative hurdles that trusts entail.

5. Unsuitable for certain assets

Not all assets are well-suited to being held in a trust. Specific business interests, for example, may be more effectively managed within a company structure, and transferring business assets into a trust could complicate operations. In addition, if the trust includes high-value assets that fluctuate in value, such as property or stocks, the complexity of managing those assets within the trust framework may prove to be impractical.

For some families, the flexibility of direct ownership and a well-drafted will is sufficient to achieve their estate planning goals.

So, what is the best option for you?

While trusts can be incredibly useful in financial planning, they are not a one-size-fits-all solution – as should be evident from the above. Depending on your specific needs and financial situation, it may be more beneficial to explore alternative structures.

If you are uncertain about forming a trust, you can trust our expert team at Huysamen Westraad Inc. to help you make the right decision. We consider your unique situation and help you find solutions that align with your broader financial goals and needs. Let’s talk.

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