When is it a good idea to open a trust, and what are the implications of this type of financial agreement?
According to property law specialist Melanie Louw "there are a variety of reasons for creating a trust".
A trust is a legal arrangement where one person, known as the trustee, holds property for the good of one or more beneficiaries.
This arrangement can be beneficial if it is executed properly, however without a thorough knowledge of the legal requirements it can do more harm than good.
In order for trusts to be effective the stakeholders need to "understand the law that applies to the trust, their duties and responsibilities, how a trust should be managed and when the trust veil can be pierced”, says Louw.
With so many legal implications and potential risks you might wonder why people choose to start a Trust at all. Louw gives 5 key reasons below for establishing this kind of agreement:
- To protect the interest of beneficiaries
- To protect beneficiaries from themselves
- To hold assets that cannot be divided
- To protect assets from third parties and creditors
- For tax purposes
How do I start?
"Ensure that you understand the reasons for forming a trust and positioning those reasons against the cost associated with forming a trust”, says Louw.
It is important to be prepared for the costs involved with setting up a trust as unexpected expenses could create tension later on.
She advises individuals to "utilise the services of an independent trustee that can act as a ‘’watchdog’’ in matters related to the trust."
Finally ensure that you do not use specimen trust deeds without considering all the implications of the deed as the trust deed is the constitutive charter of the trust and fulfil the needs of the planner, cautions Louw.
For more insights join the UCT law@work course titled 'An Introduction to the Legal, Technical, Tax and Financial Planning Implications of Trusts' which will take place on 9th November 2018.