Any conversation about wills and estate planning would be incomplete without considering the suitability of a trust to protect and manage assets. There are two types of trusts; namely testamentary trusts and inter vivos trusts. A testamentary trust, as it states, is created in the founder’s last will and testament to come into effect after death and take over stewardship of certain (or all) of the deceased’s assets in favour of the beneficiaries.
An inter vivos trust, conversely, is created during the lifetime of a person by way of an agreement between the founder and the trustee(s). Like a testamentary trust, it can also be used for estate planning purposes, but also has an important role in asset protection, potentially limiting estate duty and protecting valuable or sentimental assets from exposure to creditors. It can also play an important role in business, such as being the holding vehicle for owning and renting commercial property, while allowing the proceeds to be distributed to family members or used for the maintenance of children.
Inter vivos trusts can be set up as vesting or discretionary trusts. If it is a vesting trust, it means that at an appointed time, the trust will vest and then the named beneficiaries will have a right to receive certain benefits from the trust, with trustees managing the trust’s assets in the time between the trust’s founding and its vesting. A discretionary trust means that the trustees can use their discretion as to how benefits arising from the trust are distributed to its beneficiaries.
Katherine Timoney, Senior Associate at specialist commercial law firm Gillan & Veldhuizen Inc explains that the conduit principle is unique to discretionary trusts in that it allows trustees to distribute income and capital gains to beneficiaries, which can have tax benefits. This principle means that if income received by the trust is distributed that same year to a beneficiary, then it may ‘conduit’ directly to the beneficiary without touching the trust at all.
If properly established and managed, a trust is particularly useful for the way that it keeps assets out of the personal estate of the individual. This is advantageous from an asset protection perspective – since the trust’s property is legally separate, it is not an easy target for creditors if your business fails, if you are sequestrated, or if you have an acrimonious divorce.
It also allows for the careful management of all the trust’s assets, particularly where beneficiaries are unable to manage everything themselves. And, most importantly it allows for effective tax planning, along with the assistance of qualified tax practitioners, in order to potentially limit estate duty, income tax, CGT, donations tax and transfer duties.
The bottom line is that for trusts to be effective and well-run they require compliance and appropriate administration. Seeking advice and guidance from both legal and accounting professionals is invaluable advises Timoney.