Professional advisers – why you should know about umbrella trusts

By David Hurford, CEO, Fairheads Benefit Services 

Trusts have come under scrutiny by the authorities in recent years – mainly as there seemed to be a poor understanding on the part of the founder of the trust that the assets are no longer theirs to do as they please.  

Nonetheless, most planners do know that trusts, if used properly, continue to play a major role in the estate and financial planning environment. They can be used eg for: 

• Estate pegging 

• Continuity and succession 

• Protection of assets 

• Protection of minor beneficiaries 

• Receiving lump sums; and 

• Liquidity management. 

Stand-alone trusts 

It is common practice – and sensible advice – for parents to make provision in their will/s for a testamentary trust to be set up upon their death to cater for the needs of minor children.  

Traditional stand-alone trusts have their drawbacks, however, as they can be expensive and cumbersome to set up, manage and administer. Compliance requirements have increased significantly in the past year or so, with additional reporting required to both the Master of the High Court and SARS regarding beneficial ownership.  

The testator would have named trustees in their will who would be tasked with arranging the set-up of the trust, normally through an appointed agent who has expertise in winding up deceased estates, who would need to draw up a trust deed, have this registered at the Master of the High Court, and then see to it that the assets are administered in the best interests of the minor  and a prudent investment strategy adopted with the selection of reputable asset managers. 

The financial planner is generally involved in the process, coming alongside the executor and literally holding the family’s hand. 

Planners are in a unique position 

Planners are, therefore, in a unique position to witness some of the challenges the trustees or executor of the will would face, including: 

• Costs – a stand-alone trust can be an expensive vehicle, particularly for those less than R2million in value 

• Professionals may be reluctant to be appointed as a trustee as their fees might not be covered 

• The executor and/or the trustees may not have the expertise necessary to administer the trust appropriately 

• The financial planning professional him or herself may have vast skills in investing, but may not want to carry the burden of dealing with all the family requests which arise; and 

• There are notorious delays in establishing and registering a trust, with the backlogs at the Master of the High Court having reached all-time highs. 

Why umbrella trusts matter

This is why planners may be interested to learn about umbrella trusts and whether they would be an easier – and more professional – option for housing minors’ assets. Here, the executor – with the relevant resolution from the will-appointed trustees – would appoint a service provider of umbrella trusts to receive the inheritance. Some of the advantages of an umbrella arrangement are: 

• There is no need to register a new deed with the Master’s Office, hence there would be immediate settlement with instant liquidity 

• The assets are ring-fenced, invested and accounted for at a beneficiary level 

• The umbrella trust is professionally managed by expert trustees with extensive experience 

• The costs of running the trust are shared amongst all beneficiaries of the sub-trusts, leading to economies of scale 

• The umbrella trust outsources investment management which is tailored to take into account liquidity needs and the individual beneficiary’s investment horizon 

• There are existing policies, developed over many years, which allow great flexibility with appropriate oversight, including:  

• Income support policies 

• Ad hoc capital request policies 

• Final benefit termination policies; and  

• The umbrella trust provider/administrator reports in detail on a quarterly basis and/or on request, will also provide all the necessary documents such as an IT3b certificate. 

Other uses of umbrella trusts 

It may interest planners to know that umbrella trusts do not serve only to receive assets from testamentary and other private trusts but can also receive payments arising from  Road Accident Fund and medical malpractice claims, as well as life insurance payments and disability policies.  

They can further be considered as a safe and powerful vehicle for discretionary savings for education or another purpose, such as a client wishing to allocate their annual R100,000 tax-free donations allowance to a beneficiary account in an umbrella trust, allowing it accrue year on year. 

There are several reputable umbrella trust service providers in the market. For information on Fairheads Legacy Umbrella Trust product you can visit our website here.