Introduction

In South African family governance, trusts play a critical role in structuring wealth, protecting assets, and ensuring smooth intergenerational transitions. Two common types used by family offices are Discretionary Trusts and Inter Vivos Trusts (also known as living trusts). Each has distinct implications for control, flexibility, tax efficiency, and family governance procedures. This comparison will help families determine which structure best aligns with their governance objectives.

1. Discretionary Trusts in Family Governance

A Discretionary Trust gives trustees broad powers to decide how and when beneficiaries receive benefits.
Key Features
• Trustee Control: Trustees have complete discretion over distributions (who gets what and when).
• Flexibility: Beneficiaries’ entitlements are not fixed, allowing adjustments based on circumstances.
• Asset Protection: Beneficiaries have no direct claim to trust assets, shielding wealth from creditors.

Pros for Family Governance

Adaptability – Trustees can respond to changing family needs (e.g., a beneficiary’s financial irresponsibility).
Conflict Mitigation – Prevents entitled behaviour since no beneficiary has a guaranteed right to distributions.
Tax Planning – Income can be allocated to beneficiaries in lower tax brackets (if distributed).
Cons for Family Governance

Potential for Trustee Bias – Discretionary power may lead to favouritism or family disputes.
SARS Scrutiny – If the settlor retains too much influence, SARS may attribute trust income back to them (taxable at 45%).
Lack of Certainty for Beneficiaries – Some family members may feel insecure without guaranteed benefits.

Best For:
• Families needing long-term flexibility in wealth distribution.
• Situations where creditor protection is a priority.
• Families with complex dynamics (e.g., blended families or spendthrift heirs).

2. Inter Vivos Trusts in Family Governance

An Inter Vivos Trust (living trust) is created during the settlor’s lifetime and can be either discretionary or fixed-interest.

Key Features
• Lifetime Establishment: Takes effect immediately (unlike a testamentary trust, which activates upon death).
• Can Be Revocable or Irrevocable: Some allow modifications; others lock in terms permanently.
• Avoids Probate: Assets transfer seamlessly without court delays.

Pros for Family Governance

Structured Succession – Ensures assets pass smoothly to heirs without executor delays.
Estate Duty Savings – Removes assets from the settlor’s taxable estate (reducing estate duty exposure).
Controlled Management – Trustees oversee assets in accordance with the trust deed, preventing reckless beneficiary spending.

Cons for Family Governance

Loss of Direct Control – Once assets are transferred, the settlor cannot reclaim them (if irrevocable).
Tax Risks – If the settlor is deemed to retain “too much control,” SARS may tax trust income in their hands.
Administrative Burden – Requires annual financial statements, tax filings, and FICA compliance.

Best For:

• Families prioritising immediate asset protection and avoiding probate.
• Situations where structured, long-term wealth preservation is key.
• Families comfortable with ceding direct ownership to trustees.

Key Governance Considerations for South African Families

1. Define the Purpose – Is the goal flexibility (Discretionary) or structured succession (Inter Vivos)?
2. Choose Trustees Carefully – Independent trustees reduce conflicts and SARS risks.
3. Align with Family Constitution –The trust should complement the family’s broader governance policies.
4. Comply with Tax Laws – Ensure distributions and trustee appointments don’t trigger SARS penalties.
5. Review Regularly – As laws change and update, the structure should be updated accordingly.

Conclusion

Both Discretionary and Inter Vivos Trusts can be powerful tools in South African family governance, but they serve different needs. Discretionary Trusts offer adaptability for complex family dynamics, while Inter Vivos Trusts provide structured, probate-free succession.
For optimal governance, many South African family offices use a combination of both, with clear guidelines in their Family Constitution to prevent disputes and ensure compliance. Consulting a trust specialist and tax advisor is essential to tailor the proper structure.