Discretionary / Ownership Trust

// Types of Trust

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According to SARS, an ownership trust is created when the founder transfers ownership of assets or property to the trustees, to be held for the benefit of certain defined or determinable beneficiaries of the trust. In terms of this type of trust, the trustees are the actual owners of the trust assets. The rights of the beneficiaries in respect of the trust assets are usually determined in the trust instrument.

Discretionary trusts are the more common forms of inter vivos trusts. In these types of trusts, the vesting of benefits or assets in beneficiaries is done at the discretion of the trustees. SARS describes discretionary trusts as trusts where the trustees decide whether to, and how much of the income, assets or net trust capital of the trust is to be distributed to the beneficiaries. The beneficiaries only have contingent rights (a right that depends on a future event or the performance of an action by the trustees such as a decision to make a distribution) to the income, assets or net trust capital of the trust.

This type of trust is most suitable for proactive estate planning. Payments of income and/or capital is made at the discretion of the trustees, and all non-allocated income is taxable in the hands of the trust.

This type of trust may be utilised to save on Income Tax and Capital Gains Tax through income/capital gains splitting, instead of distributing all the income or capital gains to one individual (who may be paying tax in a higher tax bracket). In a trust, one is permitted to split these distributions between more than one person, each of whom will pay tax at a lower effective tax rate due to the progressive tax scales in South Africa, resulting in a lower tax bill.