SummaryTrusts remain a target as both SARS and the Master continuously impose stringent laws on these versatile family office planning instruments. It is therefore important to ensure that trusts are incorporated for the correct reasons and correctly administered to ensure that they comply with various laws and avoid the consequences of mismanagement.
South Africans are in love with trusts, happily supported by accountants, attorneys, and financial advisors who sell them in bulk. The optimal number of trusts required in a family office structure is a question that requires careful consideration during the initial planning phases of a family office. It can be nearly impossible to eliminate entities once they have been established and have taken ownership of family assets, mainly due to punitive capital gains tax, securities transfer tax, transfer duty, etc.
Trusts developed in the 12th century under the King of England during the times of the crusades. It allowed crusaders to entrust their property to a trustee for the benefit of their family while they were away conquering the holy land.
A trust has perpetual existence and will continue to exist even after the demise of the founder and the initial beneficiaries and trustees. This characteristic makes it the most stable platform for the management of family wealth and for the seamless transfer of the benefits thereof from one generation to the next.
A family office structure should have a trust for each branch of the family. Forcing a group of individuals to invest and operate family wealth solely as a collective will deprive them of their individuality and inevitably create friction and tension in the family. The solution is to create a trust structure for each child.
Giving children access to even a small portion of the family wealth to manage separately on their own terms and in line with their personal values can empower them. The bulk of the family wealth can still be managed separately, in terms of a carefully planned and executed multi-generational investment plan.
Occasionally it could make sense for a family to establish a separate silo, completely removed from the main family office structure. The main benefit is to manage the risk of a catastrophic event that could severely affect the value of the main family office structure. This is often the case where the net asset value of the main structure is dominated by a single asset, as is the case for large family-owned operating companies.
In certain instances, it may not be practical to transfer ownership of family assets into an inter-vivos trust for a variety of reasons, including punitive capital gains tax, securities transfer tax, transfer duty, etc. on the disposal of the asset. In these instances, the drafting of a last will and testament to create a testamentary trust on the demise of the owner will give the family the long-term inheritance structure required for the growth and maintenance of multi-generational wealth.
Trusts serve as the perfect ultimate owner of family wealth, but they were never meant to be entities in which one operates a business. Any separate business operation requires a company, of which the trust is the shareholder.
Each family is unique and will require an individually designed family office to serve their distinctive aspirations and financial needs. Families should plan carefully to ensure that the inheritance structure does not end up with unnecessary trusts that will complicate the management of family wealth.