How does a living (inter vivos) trust work, and is it worth it?
A living trust (inter vivos trust) is a legal entity created during a person's lifetime to hold and manage assets on behalf of beneficiaries. Once an asset is moved into the trust, it no longer belongs to the individual's personal estate.
While this structure is highly effective for freezing the value of an estate to save on estate duty, it comes with a severe trade-off: trusts pay the highest possible rates of income tax and capital gains tax in South Africa.
Living trust vs testamentary trust
A testamentary trust is written into a will and only comes into existence after the person dies. It is primarily used to protect inheritances for minor children until they come of age.
An inter vivos trust (or living trust) is set up and operates while the founder is still alive. It is a separate legal entity with its own bank account, pays its own taxes, and requires appointed trustees to manage the assets on behalf of the beneficiaries.
Pegging the value of an estate
The primary reason wealthy South Africans use living trusts is to reduce estate duty.
When a person holds a growing asset like property or an investment portfolio in their personal name, the future estate duty bill grows alongside the asset's value. If that asset is moved into a living trust, all future growth happens outside the person's estate. The value of their personal estate is "pegged" or frozen, saving a significant amount of tax on decades of future growth.
The loan account mechanism
Moving an asset into a trust is not as simple as giving it away. If a founder donates a R2 million property to a trust, the South African Revenue Service (SARS) levies a 20% donations tax on the value exceeding the R150,000 annual exemption.
To avoid this, the founder usually sells the asset to the trust. Because the trust has no money, the founder lends the trust the money to buy it, creating a loan account. The physical property now belongs to the trust, but the loan is an asset in the founder's personal estate. Over twenty years, the property might double in value, but the loan amount remains exactly the same — freezing the estate's value while the growth occurs in the trust.
The harsh tax trade-off
To discourage ordinary taxpayers from using trusts purely to hide money, SARS taxes trusts aggressively.
A standard living trust pays a flat income tax rate of 45% from the very first Rand it earns. It does not qualify for the R99,000 tax-free threshold or the R17,820 primary rebate that individuals enjoy.
When a trust sells an asset, it faces an 80% capital gains inclusion rate. This results in a maximum effective capital gains tax (CGT) rate of 36% — exactly double the 18% maximum effective rate applied to individuals.
The conduit principle
To legally lower this punitive tax burden, trustees often use the conduit principle.
If the trust earns rental income or makes a capital gain, the trustees can choose to distribute that money directly to the beneficiaries in the same tax year. The income flows through the trust like water through a pipe and is taxed in the hands of the beneficiary. Because the beneficiary is a natural person, the income is taxed at their personal, much lower marginal rate.
Is a living trust worth it?
A living trust is expensive to register, requires annual accounting fees, and attracts the highest possible tax rates on any money kept inside it.
For ordinary households whose total assets fall below the R3,500,000 estate duty abatement (or R7,000,000 for a married couple), the administrative costs and income tax penalties far outweigh any estate duty savings. Living trusts are generally only mathematically viable for high-net-worth individuals building multi-generational wealth, or business owners needing to protect assets from personal creditors.
Terms used on this page
- testamentary trust
- A trust created inside a person's will that only comes into existence after their death, typically used to hold and manage money left to minor children.
- inter vivos trust
- A trust created during a person's lifetime to hold and manage assets separately from their personal estate; also called a living trust.
- assets
- What you own that has value — property, savings, investments, retirement funds, a business.
- estate duty
- A tax levied on the total value of a deceased person's estate, payable before the remaining assets are distributed to heirs.
- donations tax
- A tax levied by SARS at 20% on the value of money or property given away for free by a South African resident, above the annual exemption.
- rebate
- A fixed amount SARS subtracts from your calculated tax each year. It is what makes the first slice of income effectively tax-free.
- inclusion rate
- The slice of a capital gain that gets added to your taxable income. For individuals it is 40% — the other 60% of the gain is never taxed.
- conduit principle
- A tax rule that lets income or a capital gain earned by a trust flow through to the beneficiaries, so it is taxed in their hands at their personal rate rather than the trust's flat rate.
- marginal rate
- The tax rate on your next rand of income — the bracket the top slice of your income falls into.
- abatement
- The slice of an estate that is free of estate duty — currently R3.5 million. Any portion the first spouse's estate doesn't use carries over to the surviving spouse's estate.
Sources
Reviewed July 2026