Given the South African Revenue Service’s (Sars’s) drive to tax the wealthy (irrespective of whether it is an individual, a company or a trust), a lack of understanding of trusts, the current economic uncertainty, and a perception that trusts are only for the rich, people are often uncertain whether a trust should form part of their estate planning. Trusts are certainly not for everybody. When you consider a trust as part of your estate plan, you need to be mindful of both advantages and disadvantages thereof, as well as your personal circumstances and wishes.
PROTECT YOUR ASSETS
The number one wealth preservation rule is to protect your assets. If you have your own business, sizeable investments and/or other assets, a trust may help you to separate your assets from unrelated debt and other financial risks. Assets owned by a trust do not form part of the insolvent’s estate, and therefore cannot be attached by his or her creditors, unless it is part of a scheme. Correct financial planning will involve assets being bought into the trust from the outset, rather than being purchased in your personal name and then transferred to the trust. This is why it is so important to set up a trust before large assets are accumulated.
ENJOY THE FRUITS OF YOUR WORK
Unlike companies or close corporations, the trustees can decide to pay the Income Tax or Capital Gains Tax in the hands of the trust or distribute the tax liability to the beneficiaries at their marginal rate of tax, thereby paying much less tax, through a unique principle applicable to trusts, called the Conduit Principle.
A discretionary trust is flexible and caters for uncertainties such as divorce, remarrying, insolvency, increase in family size or fortunes, and changes to tax legislation.
MENTAL HEALTH “INSURANCE”
Do not underestimate this modern threat. If you have created a trust and become afflicted by a dreadful condition, such as Alzheimer’s Disease, your financial affairs would continue as before, with persons that you entrusted as trustees of the trust, without the need of curatorship.
PRESERVE YOUR WEALTH
A trust is the most effective vehicle for the preservation of wealth. As an illustration, a large farm (or other asset) being transferred from one generation to another will not be liable for the intervening Estate Duties and Capital Gains Tax, when it is held in a trust. If the farm was held by the family, these taxes due on the death of each successive family member create a huge financial drain, which could eventually force the family to sell the farm if they run into liquidity problems.
PROTECT OTHER PEOPLE
Often particular family members (such as people with disabilities and minors) need special attention and trusts are used to provide funds to look after those family members. These trusts may enjoy special tax treatment.
NO ESTATE FEEZING
An estate is frozen upon the death of an individual. It may take more than two years to finalise an estate, which could lead to financial hardship when the family cannot access any cash or assets until the estate has been wound up. In contrast, death does not interrupt the operation of a trust.
LOSS OF ASSET CONTROL
You no longer own the assets and cannot control them, but you can exercise some influence over them by being a co-trustee. Provided the founder is not seen to control the trust assets, either through his or her behaviour or through empowering provisions in the trust deed, he or she may retain some influence over the trust assets, and not lose complete control over them.
Establishing a trust generates additional administration costs, such as legal fees, accounting fees and independent trustee fees. It is important that one weighs up whether the costs of establishing and managing a trust exceed its benefits, including tax benefits and protection against total loss.
Certain requirements must be adhered to when operating a trust, such as the compilation and retention of trust records, a separate bank account, and adherence to any other specific administrative requirements stipulated in the trust deed.
Although higher tax rates apply to income and capital gains retained by the trust, the trust is always the taxpayer of last resort, after the application of the various anti-avoidance provisions introduced by Sars on trusts and the Conduit Principle.
CONSEQUENCES OF TRUSTEESHIP
There is personal risk involved in taking up trusteeship. The penalties for absentee or “puppet” trustees can be severe.
Performing a direct cost versus benefit calculation is not a simple task, because the benefits that a trust provide are not always easily measurable. The comfort of having your assets protected within the confines of a trust may, however, far outweigh any of the disadvantages. It remains a personal decision.
Phia van der Spuy is the founder of Trusteeze.
The views expressed here are not necessarily those of Independent Media.