What is a trust - and how to set one up

We've all heard the term "trust fund baby" being bandied about as a mark of wealth. A trust has become a status symbol, a way to leave a legacy, but how many of us understand what a trust is and what setting one up entails?

What is a trust?

It is a legal agreement between someone who owns assets (tangible and intangible) and trustees. Trustees are appointed to administer assets held within the trust for its beneficiaries.

There are two types of trusts that can be set up. The first is a testamentary trust, created through a will and which comes into effect when the testator dies. The other, the focus of this week's column, is an inter vivos trust, which is created while the founder or donor is still alive.

Why set up a trust?

If you want to protect valuable assets for the benefit of your immediate heir(s) and future generations, setting up a trust is a good way to ensure their interests are looked after. A trust can also be set up to take care of beneficiaries who are physically or mentally incapable of taking care of themselves.

story_article_left1

For single parents, in particular, leaving minors as beneficiaries on life policies is not always a wise move. "The main reason that this is a bad idea is that the insurance company can then pay the minor directly, if they have a bank account, which of course does not allow the money to be protected," says Harry Joffe, Discovery's head of legal services.

Transferring ownership of the policy to a trust is one way to avoid this. Business owners might also set up a trust to prevent their personal assets from being attached to their business debt.

It might seem a good idea to set up a trust to dodge the taxman, but the benefits rarely outweigh the costs of setting up and maintaining a trust.

How to set up an inter vivos trust

The founder must draft a trust deed and lodge it with the Master of the High Court so as to get the letter of authorisation for the trustees to act on behalf of the trust.

The deed outlines the purpose of the trust and the duties of and instructions for the trustees, and states who the beneficiaries are.

The Financial Planning Institute recommends that you consult a certified financial planner to understand the benefits of setting up a trust and ensure that you're aware of the tax consequences and the costs.

You should also seek the guidance of an attorney or trust company for assistance with the legal requirements, appointing trustees and outlining the trustees' duties.

story_article_right2

Appointing trustees

It's advisable to appoint at least three trustees to oversee the trust.

When appointing trustees, the FPi suggests you consider the following:

• Ensure that the trustees understand the demands of the trusteeship and that they are entrusted with the assets of the beneficiaries;

• Ensure that they have the required knowledge and skills to administer the trust properly and that they are committed to their duty as trustees;

• They must know the statutory requirements in relation to the roles they have been assigned to; and

• All the trustees should manage their own finances with great care.

It might seem like a good idea to nominate a close family member as a trustee, but if their financial affairs are not in order, can you really trust them with your children's wellbeing?

• Next week, we'll focus on the tax implications of setting up an inter vivos trust and how to increase assets in it