In an era of economic uncertainty and evolving tax laws, South Africans are increasingly turning to trusts to safeguard their assets. But with options such as testamentary and inter vivos trusts, how do you choose the right one?
What are they?
A testamentary trust is established through a valid Will and only takes effect upon death. It is typically used to manage assets for beneficiaries who are minors or adults who are incapacitated, upon your death. A testamentary trust is governed by the Last Will and Testament of the deceased and the Trust Property Control Act[1] and is registered with the Master of the High Court after death.
Inter vivos trusts are established during a founder’s lifetime via a trust deed and can operate immediately upon its registration with the Master of the High Court. It’s often used for asset protection, tax planning, or managing assets for beneficiaries while you are alive. Inter vivos trusts are governed by the Trust Property Control Act[2], and is registered with the South African Revenue Services (SARS) for tax compliance.
Key Differences
Setup and Timing:
- Testamentary: Only activates after death; therefore, no control or benefit will occur during your lifetime. The setup is simpler, as it’s part of the will-drafting process, but it’s subject to the estate administration process.
- Inter Vivos: Requires a trust deed and registration while you are alive, involving more upfront costs, such as legal fees and registration costs. Its operation allows immediate asset transfer and management once a Letter of Authority has been issued by the Master of the High Court.
Control and Flexibility:
- Testamentary: Less flexible, as the terms are fixed in the will and cannot be changed after death. It is also suited for specific purposes such as protecting minor children’s inheritance.
- Inter Vivos: Highly flexible, as trustees can adapt to changing circumstances, for example, new tax laws and beneficiary needs. It is popular for business owners or families with complex assets.
Cost:
- Testamentary: Lower initial cost, as it’s part of the will drafting process, but estate administration fees apply after death.
- Inter Vivos: Higher upfront costs, for example, deed drafting, registration, potential transfer duties, but it can save on estate duty or capital gains tax over time.
Tax Implications
- Testamentary: Subject to estate duty and capital gains tax when transferring assets. Where beneficiaries to a testamentary trust are minor children or mentally or physically incapacitated people, beneficiaries are taxed on the normal income tax scales for individuals.[3]
- Inter Vivos: Assets transferred during life may trigger capital gains tax or donations tax, especially under Section 7C for low-interest loans to trusts. However, it can reduce estate duty by shrinking your taxable estate. Additionally, inter vivos trusts are taxed at 45% on income retained and or vested in the trust.[4]
Common Uses in South Africa
- Testamentary: Often used for minor children or dependents with special needs, ensuring funds are managed until they reach the nominated age of majority as per the terms of the Will. A testamentary trust is also useful to prevent minor or incapacitated heirs’ inheritance from vesting in the Guardian’s Fund, which is a state-administered fund.
- Inter Vivos: Popular for asset protection against creditors, business succession and continuity, estate duty mitigation and financial support for beneficiaries.
Pitfalls to avoid in Trust Planning
While trusts offer significant benefits for estate planning in South Africa, several pitfalls can disadvantage their effectiveness, leading to potential financial losses, tax penalties or legal disputes. Awareness of these pitfalls is crucial for clients.
Testamentary Trusts
- Vague Will Terms and Clauses
It is important to avoid vague or ambiguous terms regarding the testamentary trust in a Will as this could create uncertainty regarding the testator’s intentions, leading to disputes amongst beneficiaries and potential issues when it comes to registering the testamentary trust. Always consult with an experienced attorney to ensure that your Will complies with the Wills Act[5], to avoid it being declared invalid and preventing the testamentary trust from being registered.
- Inexperienced trustee
Appointing a trustee that lacks the necessary expertise which could lead to mismanagement of the testamentary trust, thereby prejudicing minor and incapacitated heirs.
Inter Vivos Trusts
- “Alter ego” Trusts
This is where the founder retains sole control over assets and there is often no distinction between the trust and the founder’s personal estate. This is often due to the lack of an appointment of an independent trustee and where the founder, who is also a trustee and beneficiary, oversees all the decisions. This could result in Courts disregarding the trust’s separate legal identity, making the trust susceptible to creditors and/or divorce claims.
- Non-compliance with Beneficial Ownership Reporting Requirements
On 1 April 2023, an amendment to section 11A of the Trust Property Control Act[6] came into effect, requiring all trustees to declare beneficial ownership of trusts. This obliges trustees to keep a record of information relating to beneficial owners of the trust, ensuring that the prescribed information relating to beneficial owners of the trust is lodged with the Master of the High Court and to ensure that this information is kept up to date.[7]
Conclusion
Choosing the right trust depends on your assets, goals and family dynamics. With South Africa’s evolving tax, trust and estate laws, professional guidance is essential to maximize trust benefits and to ensure compliance.
[1] Act 57 of 1988.
[2] Act 57 of 1988.
[3] Engelbrecht, Y ‘The value of testamentary trusts in safeguarding the interests of minor children and dependants with special needs’ available at https://www.fnb.co.za/blog/investments/articles/Trusts-TestamentaryTrust-20240430/?blog=investments&category=Wills%20and%20legacy%20planning&articleName=Trusts-TestamentaryTrust-20240430&srsltid=AfmBOoqtPf6lUvDKmxtqhJskR0eb9HZjE1Lp53uojuG_rmqplM9CVQ6s (accessed on 15 August 2025).
[4] Engelbrecht, Y ‘The value of testamentary trusts in safeguarding the interests of minor children and dependants with special needs’ available at https://www.fnb.co.za/blog/investments/articles/Trusts-TestamentaryTrust-20240430/?blog=investments&category=Wills%20and%20legacy%20planning&articleName=Trusts-TestamentaryTrust-20240430&srsltid=AfmBOoqtPf6lUvDKmxtqhJskR0eb9HZjE1Lp53uojuG_rmqplM9CVQ6s (accessed on 15 August 2025).
[5] Act 7 of 1953.
[6] Act 57 of 1988.
[7] Lamola L & Kharsany N ‘Commencement of the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act’ (2023) available at https://www.webberwentzel.com/News/Pages/commencement-of-the-general-laws-anti-money-laundering-and-combating-terrorism-financing-amendment-act.aspx (accessed on 15 August 2025).
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes and should not be construed as legal advice.
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