The main downside of a trust is that the benefits come with less personal control, more administration and potentially higher tax and professional costs. Once an asset has genuinely been transferred to a trust, it is no longer the founder’s personal asset to use or dispose of at will. The trustees must manage it collectively and in accordance with the trust deed and their fiduciary duties.

An ordinary trust can also be expensive from a tax perspective if income or gains are retained and taxed in the trust. The current rate is 45% on taxable income and the maximum effective capital gains tax rate is 36%. Funding through low-interest or interest-free loans can bring section 7C into consideration, while transferring assets into or out of a trust can itself trigger tax and transaction costs.

A trust also requires ongoing governance. Beneficial ownership records, SARS returns and other required submissions must be maintained, and trustees must be able to demonstrate genuine decision-making. Where the trust form is abused, transactions or trustee decisions can be challenged and tax consequences can follow under the applicable legislation. A trust makes sense only where its long-term purpose justifies the additional complexity.

See also: What are the disadvantages of a family trust? | What are the disadvantages of a trust in South Africa? | Is a family trust a must?

Disclaimer: The information provided here is intended as general guidance only and does not constitute legal, tax, or financial advice. Every situation is unique, and legislation is subject to change. We invite you to reach out to our team at Wealth and Legacy Group for guidance tailored to your specific circumstances.