Trusts in South Africa
TYPES OF TRUST
There are three types of trusts under South African law:
- An “ownership trust”, under which the founder or settlor transfers rights of assets or property to a trustee(s) to be held for the benefit of the beneficiaries of the trust.
- A “bewind trust”, under which the founder or settlor transfers rights of assets or property to beneficiaries of the trust, but control over the property, is given to the trustee(s).
- A “curatorship trust”, under which the trustee(s) administers the trust assets for the benefit of a beneficiary that doesn’t have the capacity to do so, for example, a curator placed in charge of a person with a disability.
Trusts can be described in various ways:
- The way in which they are formed:
- Inter vivos trust is created during the lifetime of a person
- Mortis causa (testamentary) trust is set up in terms of the will of a person and comes into effect after their death.
- The rights they give beneficiaries:
- Vesting trust – the income (both of a revenue and capital nature) or assets of the trust are vested in the beneficiaries. The beneficiaries have the vested rights to the income or assets of the trust.
- Discretionary trust – the trustee(s) usually have the choice whether to and how much of the income or capital of the trust to issue to the beneficiaries. In these circumstances the beneficiaries only have contingent rights to the income or capital of the trust.
Top Tip: A combination of both vested and discretionary rights are also possible.
- Their purpose:
- Trading trusts
- Asset-protection trusts
- Charitable trusts or
- Special trusts.
For tax purposes the following types of special trusts are recognised:
- Special Type A – a trust created only for the benefit of a person(s) with a “disability”, as defined in section 6B(1), where the disability makes it impossible for the person(s) from earning enough money for their care or from managing their own financial matters.
- Special Type B – a trust created only for the benefit of a person(s) who are relatives of the person who died and who are alive on the date of death of that deceased person (including those conceived but not yet born), and the youngest of the beneficiaries are younger than 18 years on the last day of the year of assessment.
Top Tip: These descriptions are not mutually exclusive. For example, an Inter vivos trust can be both a type-A trust and a discretionary trust, and a testamentary trust can be both a type-B trust and a discretionary trust.
A founder/settlor creates a trust for the benefit of beneficiaries. A trustee is normally the representative taxpayer of a trust.
How is the income of a Trust taxed?
Depending on the circumstances the income of a trust can be taxed in the hands of the:
- Beneficiary or
Where the trust itself is taxed, it’s taxed at a flat rate of 40%. Special trusts are taxed at a sliding scale from 18% to 41% (same as natural persons).