How a trust is created: inter vivos vs testamentary
The first way to classify a trust is by how it comes into existence. An inter vivos (living) trust is set up by a written trust deed while the founder is still alive. It does not become operative the moment the deed is signed: the trustees may only act once the Master of the High Court has issued letters of authority. This is the trust used in almost every estate-planning structure, because it lets the founder move growth assets out of their own estate during life. The mechanics are covered in how to register a trust.
A testamentary trust (also called a will trust or trust mortis causa) is created by a clause in the founder’s will and only comes into existence on the founder’s death. The executor administers the estate first and then hands the relevant assets to the trustees of the testamentary trust, who hold them for the named heirs — commonly minor children who cannot yet inherit outright. Both kinds are governed by the same statute, the Trust Property Control Act 57 of 1988, and both need a founder, trustees and beneficiaries: see the cast of characters.
Special trusts: the gently taxed category
A special trust is not a different legal animal — it is a tax classification in the Income Tax Act 58 of 1962 that gives a qualifying trust a softer tax treatment than an ordinary trust. There are two kinds, and the distinction matters because they are defined differently and only one of them qualifies for some of the section 7C concessions.
A paragraph (a) special trust is a disability trust. It can be created either inter vivos or by will, and it must be set up solely for the benefit of a person (or persons) with a disability as defined in section 6B of the Act, where that disability makes the person unable to earn enough to maintain themselves. A paragraph (b) special trust is different: it is a testamentary trust created by a deceased person solely for the benefit of that person’s relatives who are alive on the date of death and the youngest of whom is under 18 (a minor). Do not conflate the two: the disability trust is paragraph (a); the testamentary-for-minor-relatives trust is paragraph (b).
The practical pay-off is the tax rate. An ordinary trust is taxed at a flat 45% on retained income and pays capital gains tax at an effective 36% (80% inclusion × 45%). A special trust is instead taxed on the same sliding scale as a natural person, so its capital gains tax effective rate is capped at 18% — half the ordinary-trust rate. How these rates flow through to beneficiaries is explained in trust taxation.
Bewind trusts: where the beneficiaries own the assets
The trusts above are all ownership trusts (the bewind’s opposite): the trustees hold legal title to the assets and the beneficiaries have no direct ownership — only rights against the trustees. A bewind trust inverts this. In a bewind, the beneficiaries own the trust assets from the outset, and the trustees merely administer or control them on the beneficiaries’ behalf. The name comes from the Roman-Dutch concept of placing property under administration.
That ownership difference is the whole point for estate planning. Because a bewind’s beneficiaries already own the assets, those assets form part of the beneficiaries’ estates and are reachable by their personal creditors — the very exposures an ownership trust is built to avoid. A bewind is therefore generally a weaker shield than a discretionary ownership trust, and is used in narrower situations (for example, holding a specific asset for a named child who is intended to own it). The Trust Property Control Act applies to both, so trustees of a bewind still owe the statutory duties and still need letters of authority.
Vested vs discretionary rights
Cutting across all of the above is the most important practical distinction of all: what rights the beneficiaries actually have. In a vesting trust the income, gains or assets are already vested in the beneficiaries, who therefore hold fixed vested rights. In a discretionary trust the trustees decide each year whether and how much to distribute, so a beneficiary has only a contingent or discretionary right — a hope of benefiting. The SARS trust return guide draws the line plainly:
Under a vesting trust the income or capital gain or assets of the trust are vested in the beneficiaries and the beneficiaries are said to have vested rights … Under a discretionary trust, the trustees usually have the discretion as to whether and how much of the income or capital of the trust to distribute to the beneficiaries[; the beneficiaries] merely have contingent/discretionary rights (hope or spes) …
For tax purposes “beneficiary” is read very widely, so even a beneficiary who only has a contingent right — for example one whose benefit depends on reaching a certain age — is already a beneficiary. SARS spells this out in Interpretation Note 67, quoting the statutory definition:
“beneficiary” in relation to a trust means a person who has a vested or contingent interest in all or a portion of the receipts or accruals or the assets of that trust; [IN 67 adds:] This definition is wide and includes capital and income beneficiaries with vested rights and discretionary beneficiaries … A contingent beneficiary whose rights are dependent upon, for example, reaching a specific age, will … also be a ‘beneficiary’ prior to that date.
Note — Interpretation Note 67 (Issue 4) adds a qualifier to its wider reading: a discretionary beneficiary counts provided they are designated as such in the trust instrument.
Which type should you use?
Frequently asked questions
An inter vivos (living) trust is created by a written trust deed while the founder is alive and exists once the Master issues letters of authority. A testamentary trust is created by a clause in a will and only arises on death, when the executor hands the assets to the trustees. The living trust pegs an estate during life; the testamentary trust looks after heirs after death. See how to register a trust.
A special trust is an Income Tax Act category taxed more gently than an ordinary trust. A paragraph (a) special trust is a disability trust (inter vivos or by will) for a person with a disability under section 6B; a paragraph (b) trust is a testamentary trust for the deceased’s relatives whose youngest member is under 18. Special trusts use the individual sliding scale — CGT effective rate capped at 18%, not the 36% an ordinary trust pays.
A bewind trust is one where the beneficiaries own the assets outright and the trustees only administer them — the opposite of the usual ownership trust, where trustees hold title and beneficiaries have no direct ownership. Because the beneficiaries already own the assets, those assets sit in their estates and are reachable by their creditors, so a bewind is generally weaker for asset protection.
In a vesting trust the income, gains or assets are already vested in the beneficiaries, giving them fixed vested rights. In a discretionary trust the trustees decide each year whether and how much to distribute, so beneficiaries have only a contingent right — a hope (spes). Most family estate-planning trusts are discretionary, because that flexibility lets trustees direct income and gains to the beneficiary taxed most efficiently. See how trusts are taxed.
The strongest choice is a discretionary inter vivos ownership trust. Because the trustees — not the beneficiaries — own the assets and no beneficiary has a vested right, the property is generally beyond the reach of personal creditors. A bewind is weaker because the beneficiaries own the assets. Protection only holds if the founder genuinely gives up control — an alter-ego trust can be disregarded.