Why Trust Funds Are Used to Protect Assets

Trust funds are legal instruments to enable the protection of assets and the continuity of a person’s financial legacy.

To understand the working of a trust fund, let’s look at this scenario: John has worked hard over a period of 40 years and has built a rather comfortable hedge against financial risks. He knows he is getting older and since death is one risk he cannot escape forever, he wants to make sure that his loved ones are taken care of in the event of his death.

Unfortunately, not all his children are financially responsible and may spend their heritage within a couple of months. He also fears that his grandchildren may end up with nothing if their parents make financial mistakes. So he visits a trust lawyer who helps him to set up a trust fund, which helps to protect the assets and ensures that the beneficiaries receive their income without ever being able to use the assets in the trust as collateral for debt, and in this way achieves his objective of ensuring that his loved ones are taken care of.

Customisation of the Trust

You can set certain conditions to be met before lump sums are payable, such as that the beneficiaries may only receive the particular funds when they turn a specific age. You can also set conditions for the trust of your estate to only pay out funds for education costs or to pay out monthly amounts. The trust fund is thus an excellent tool to ensure that the appointed beneficiaries receive ongoing income or can only use the funds for specific purposes.

Once you have transferred the assets to the trust you are no longer the owner. The assets belong to the trust. However, you can be a trustee and a beneficiary and can also receive benefits from the trust.

You appoint the trustees who will have the responsibility to manage the trust fund according to the initial stipulations. The board of trustees must meet annually and should take great care in managing the funds. Appointing a bank or law firm for handling the trust fund is often recommended to minimise the risk of mismanagement.

Since the assets belong to the trust, the trust pays the income tax on the assets and with proper estate planning, it is also possible to reduce estate duty. Note that there are fees involved in setting up and managing a trust, including legal fees. If the trust only comes into being upon your death, it will then be managed according to the requirements of your will.

In summary, the benefits of trust funds are numerous and include, but are not limited to:

  • Asset protection against creditors.
  • Professional management of assets.
  • Provide continuity of the asset management and thus your financial legacy.
  • Reduce estate duty payable.
  • Protect financially irresponsible loved ones from spending all their money.
  • Preserve assets and financial wealth for your loved ones and grandchildren.
  • Secure finance for caring for a loved one that is disabled.
  • Protect income for tertiary education.

Setting up a trust fund requires legal and financial expertise as available from our team of lawyers.