Should you set up a trust for your child’s education in South Africa?

Question:

I’d like to set up a trust for my five-year-old daughter’s education. Is this the right move?

Answer:

A trust can be an excellent vehicle for providing for your daughter’s education, but it can also be unnecessarily expensive and complex. The real issue is not whether a trust is good or bad. It is whether it is appropriate for the goal you are trying to achieve.

Let’s break it down properly.

The pros

There are legitimate reasons to consider one. A properly constituted inter vivos (living) trust is a separate legal entity. The assets in it no longer belong to you personally. This means they are generally protected from your personal creditors and do not form part of your estate on death.

If something happens to you, the trust continues. Trustees can carry on paying school fees and university expenses without waiting for your estate to be wound up. This continuity is real and valuable.

A trust deed can be drafted specifically to fund education. It can restrict use to school fees, tertiary education and related expenses. It can also prevent capital from being accessed for frivolous purposes.

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For parents worried about an 18-year-old suddenly gaining control of a large sum, this structure offers behavioural protection.

If funded consistently and from early enough, a trust can remove growth assets from your personal estate. Over time, this may reduce estate duty exposure and create a longer-term intergenerational wealth vehicle. For high-net-worth families, this strategic benefit can be significant.

But these advantages must be weighed against the cons.

The cons

Trusts are not plug-and-play savings accounts – and they are expensive to maintain. A trust requires annual financial statements. It must submit tax returns. Proper books must be kept. Trustees have fiduciary responsibilities. The Master’s Office expects compliance. In most instances, you will need an accountant annually.

For a modest education fund, these costs can materially erode returns. If the capital base is small, the structure may end up costing more than it adds in value.

Trusts are also taxed heavily, at a flat 45% on their income, and they have an effective capital gains tax rate of 36%. That is significantly higher than the effective rate applicable to most individuals.

Yes, income can be distributed to beneficiaries in the same tax year under the conduit principle to avoid the punitive trust rate. However, this requires active annual planning and correct execution. If the mechanics are not handled properly, the tax bill is unforgiving.

Finally, there’s the schlep of getting money into the trust. Funding a trust is not seamless. You may donate up to R150,000 per person per year without triggering donations tax. Amounts above that attract 20% donations tax in the donor’s hands.

An alternative to trusts

Before defaulting to legal complexity, it is worth asking a simpler question: what if you invested directly in your child’s name?

A standard unit trust portfolio in her name is often far cheaper to administer, simpler to manage and potentially more tax efficient for long-term capital growth.

A minor child has her own tax thresholds and capital gains exclusion. Although attribution rules apply to certain income streams, long-term equity growth can still be taxed favourably in her hands.

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Most importantly, there are no annual trust compliance costs. No trustee meetings. No Master’s Office filings. Just an investment platform compounding over time.

For many families funding education only, this simplicity wins. However, simplicity introduces one major consideration. If you invest in your daughter’s name directly, she gains legal control of the funds at 18. That is not negotiable. You cannot retrospectively impose conditions.

For some parents, this is perfectly acceptable. For others, it is a source of discomfort. An 18-year-old with access to substantial capital may not always make decisions aligned with long-term intentions.

A trust allows you to stagger control. You can specify distributions at 21, 25 or even later. You can maintain trustee oversight during the transition to adulthood. This is often less about tax efficiency and more about behavioural management.

If creditor protection or divorce structuring is a key concern, a properly structured trust can provide insulation that a simple investment account may not.

If your goal is purely to fund education, and the capital base is moderate, a well-structured unit trust portfolio in your daughter’s name is often the most efficient and cost-effective solution.

Keep costs low, invest cleverly, review annually and let compounding do the heavy lifting on your behalf. DM

Kenny Meiring MBA CFP ® is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to kenny.meiring@sfpwealth.co.za

This story first appeared in our weekly DM168 newspaper, available countrywide for R35.