As a government employee, you’re likely thinking carefully about your financial future—especially how to protect your assets and ensure your family’s financial security. One common question I get is, “Should I set up a trust for my family and assets?” Earlier this week, Zanele, a fellow government employee, posed exactly this question to me.
I’m Dhevan Naicker, your retirement design specialist, dedicated to helping government employees like you make informed financial decisions about retirement, resignation, and wealth protection.
In this article, I’ll unpack what trusts are, their benefits and drawbacks, and the key factors you should consider before deciding if setting up a trust is the right move for you.
What Exactly is a Trust?
Simply put, a trust is a legal arrangement designed to manage your assets and estate planning effectively. Here’s how it works:
- You transfer ownership of assets (e.g., your home, vehicles, investments) into a trust.
- The trust manages these assets for beneficiaries (usually your family).
- Trusts do not “die”; they continue indefinitely, unlike individuals.
This means assets within a trust can avoid some taxes and fees associated with passing them on after your death.
Types of Trusts
There are two primary types of trusts:
1. Testamentary Trust (Created via Will)
This trust:
- Comes into existence only upon your passing.
- Usually set up if your beneficiaries (e.g., children) are under 18.
- Manages and protects your assets until your children become adults.
2. Living Trust (Inter Vivos Trust)
This trust:
- Is set up during your lifetime.
- Allows immediate transfer of your assets into the trust.
- Helps reduce estate taxes and executor fees significantly.
The Benefits of Setting Up a Trust
Trusts can offer numerous advantages, especially for government employees who seek stability and protection:
- Asset Protection for Minors: Trustees manage and protect assets on behalf of young children, ensuring funds are used wisely for education, health, and general welfare.
- Reduction in Estate Duty: Assets in a trust aren’t subject to estate duty at the time of your passing.
- Lower Executor Fees: Assets held in trust avoid executor fees because they’re not part of your personal estate.
- Control and Continuity: Trusts ensure your wishes are carried out precisely as intended, beyond your lifetime.
Important Considerations and Potential Drawbacks
Trusts aren’t without their complexities and considerations:
- Initial and Ongoing Costs: Setting up and managing a trust incurs legal and administrative fees.
- Tax Implications: Trusts themselves are subject to taxation, often at higher rates, and recent legislation changes have reduced some of their tax benefits.
- Regulatory Changes: Tax rules around trusts (e.g., rules for loans and donations) have become stricter, requiring careful planning and management.
- Loss of Direct Control: Once assets are in a trust, you cannot treat them as personal property. Decisions (e.g., home renovations or selling assets) must go through trustees and be formally documented.
Practical Example: Property and Trusts
Let’s say you own a home worth R1,000,000 and wish to transfer it into a trust:
Previously, you could loan the trust money interest-free. Current SARS rules require the trust to pay interest on this loan. If no interest is charged, SARS considers it a donation, and donation taxes apply.
Careful consideration of these tax implications is essential before setting up a trust.
Beware of Common Pitfalls
Ensure you:
- Avoid treating trust assets as personal property: Regulators may invalidate your trust, reverting tax benefits and increasing liabilities.
- Stay Updated: Regularly review your trust with a professional to ensure it aligns with current laws and remains tax-efficient.
Is a Trust Right for You?
Ultimately, the decision to set up a trust depends on your personal circumstances:
- Do you have minor children?
- Do you have substantial assets?
- Are you seeking to minimize estate duty and executor fees?
- Can you manage the complexities and costs of maintaining a trust?
Consulting with a financial advisor who understands government employee finances is highly recommended to navigate these important questions.
Final Thoughts
Trusts are powerful tools for protecting your assets and family’s financial future. However, they must be approached thoughtfully, considering both benefits and responsibilities.
Was this article helpful? Please share your key takeaways or any questions you might still have in the comments below!
Disclaimers:
Retirement Wellness SA is an Authorised Financial Services Provider (FSP 31609). This article provides information, not direct advice.
This information is not provided by or on behalf of the Government Employees Pension Fund (GEPF). We do not act on behalf of the GEPF.
