When to Create a Trust Fund

A trust is set up by the founder who then surrenders assets to the trust, which is administered by a trustee or trustees to the benefit of the appointed beneficiaries. In setting up a trust fund, you ensure that the powers of the founder are separated from that of the beneficiaries and the trustee/s and to protect the assets within the trust for a variety of reasons as explained below.

A trust fund for your children can be an effective tool for protecting income generating assets for your children and to avoid expensive estate duty tax. However, before you set up trust funds for your children, consider the benefits and disadvantages of trusts.  As effective a tool a trust can be, it can also be rather expensive to maintain.

The main reasons why the growing trend is to set up trust fund systems can be found in the functions these estate planning tools offer:

  • Protecting the inheritance of minor beneficiaries.
  • Provision for inheritance for a specific child or family member.
  • Minimising estate duty and other taxes such as capital gains tax.
  • Protecting assets against creditors.
  • Protecting the ability of a business to continue trading.
  • Protecting a financially irresponsible beneficiary against reckless spending.
  • Ring fencing of a particular beneficiary in a deceased estate.

Experts agree that setting up a trust should always be done as part of the overall estate planning strategy rather than for the sake of having a trust. The living or discretionary trust offers the benefit of being rather flexible regarding changes in the family structure and financial circumstances. The trustee/s can thus administer the trust in relation to such factors to protect the assets within the trust. A divorce, increase of family income, tax law changes, insolvencies or the passing away of a relevant family member are all factors that will affect the trust.

You can also set up the trust for the purpose of guaranteeing succession in the instance of your death to minimise the legalities surrounding personal estate asset management. While the assets in your personal estate will not be available for a while the assets in the trust will still be available to the relevant beneficiaries.

The trust can be set up for joint ownership over assets, such as family farms, thereby ensuring that all owners will have rights and the asset will be protected against creditors.

Just as with any other financial vehicle, a trust has some disadvantages such as being expensive to administer and higher taxes apply to the income that is held in the trust fund. It is therefore very important to choose which assets to include in the trust.

It is essential to plan ahead by choosing the trustees carefully. It is always better to get an independent trust company to be a trustee than using a family member. Professional asset management will help to protect the assets when you are deceased.