What a will does
A will is the document that takes effect on death. It nominates an executor, distributes your assets to your heirs, appoints guardians for minor children, and can establish a testamentary trust to hold a minor's inheritance until they reach a chosen age.
Every adult South African with assets, dependants or specific wishes should have one. It is the cheapest single piece of estate planning you can do.
What an inter vivos trust does
An inter vivos trust is set up during your lifetime. Assets are transferred to the trust and held by trustees for the benefit of named beneficiaries.
Done properly, a trust can house growth assets outside your estate, protect assets from creditors, and provide for beneficiaries who cannot manage assets themselves (minors, family members with disabilities, beneficiaries with substance-abuse issues).
The tax reality
Income retained in a trust is taxed at a flat 45% - the highest marginal rate. Capital gains in a trust attract an effective 36% CGT rate.
The conduit principle allows income and capital gains to be distributed to beneficiaries and taxed in their hands at their (usually lower) personal rate. This is what makes trusts efficient - but it requires distributions, not retention.
Donations into the trust above R100,000 per year attract donations tax at 20% (25% above R30 million). Loan accounts under Section 7C of the Income Tax Act are deemed to bear interest at the official rate, and any shortfall is treated as an annual donation.
When a trust is overkill
For most people with one home, retirement savings and a modest investment portfolio, a clearly drafted will plus a testamentary trust for minor children's inheritance is enough.
Trusts add real value when you have growth assets you want kept out of your estate, dependants who cannot manage assets, or a family business that should outlive you. Outside of those scenarios, the running costs and tax friction usually outweigh the benefits.
Common questions
Do I need a trust if I have a will?
Most South Africans do not. A clearly drafted will, together with a testamentary trust for minor children if needed, is enough for typical estates. Inter vivos trusts make sense for asset protection, growth assets you want outside your estate, or beneficiaries who cannot manage their own affairs.
What is the tax rate on a trust?
Income retained in a trust is taxed at a flat 45% and capital gains at an effective rate of 36%. Distributing income and gains to beneficiaries under the conduit principle generally moves the tax to their (usually lower) personal rate.
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