Phia van der Spuy

JOHANNESBURG - There are many misconceptions that surround trusts, to the point that the word “trust” has become something of a swear word in many conversations.

Trusts were extremely popular in the eighties and nineties, but this is no longer the case. The SA Revenue Service (Sars) has given a great deal of negative publicity towards trusts in recent years.

WATCH: An introduction into trusts with Phia van der Spuy


Sars frowns upon the use of trusts, treating them as the black sheep of the family of investment vehicles available to South African tax residents. Its ongoing attacks on trusts have resulted in many trust owners deregistering their trusts, and transferring assets out of their trusts and into their personal names.

This has often been due to unscrupulous specialists in the financial and legal profession having abused this position of discomfort to create revenue for themselves by recommending that their clients “restructure” their assets. Trusts do not generally form part of estate planning discussions between clients and their advisers.

This is often due to the fact that many advisers - including accountants, attorneys, and financial advisers - do not understand trusts themselves. Either that, or they have limited knowledge of them. It is often, and quite sadly, a case of the blind leading the blind.

Due to the limited knowledge that surrounds trusts, compounded with the scepticism towards them in the current marketplace, people who don’t own trusts are generally sceptical to set them up in the first place. Fortunately, in this quagmire of misinformation, a rope has been thrown out to rescue those who are sinking deeper and deeper into confusion and despair.

If you currently have a trust, it is possible to empower yourself to become smarter than your lawyer, your accountant, or your financial adviser. There is nobody who knows and understands your financial circumstances better than you do. As such, why would you want to leave decisions in terms of what you want to achieve with your estate plan in the hands of a “professional” who is not ultimately impacted by the outcome of your financial plan?

I often hear people say: “I have an excellent lawyer who is taking care of my trust, and I trust him.” I would usually respond by asking these same people whether they have taken the time to read their trust deeds, or - in cases where the trust was set up years, or even decades, earlier - whether their trusts have been adapted for changing circumstances, for example marriage or after a divorce.

They may also not be aware that 90percent of trust deeds in South Africa are problematic, and that theirs may very well be part of this statistic.

Many trustees have little knowledge of what is expected of them as managers of a trust. Many have never even read the trust deed; a contract that can create serious problems down the line if its management is not strictly adhered to. And no trustee can ever claim ignorance.

It has become necessary for trust “owners” to educate themselves, so that they know enough to at least be able to question their “professionals”.

A good starting point is to understand the general myths and truths surrounding trusts.

Once you are familiar with both sides of the equation, you will be able to decide whether a trust remains an option as part of your estate plan, and whether you have been negatively influenced by the media and “professionals”.

Myths vs truths

MYTH: Trusts do not serve a purpose until you have created wealth.

TRUTH: The wealthy set up trusts before they became wealthy, to save costs and to reduce risk. To create wealth first and then register a trust will in some instances be far too costly, when considering Capital Gains Tax, transfer costs, etc that will become payable once you move your assets into trust. The right time to create a trust is when you prepare yourself to build wealth.

MYTH: Trusts have the worst tax rate.

TRUTH: Trusts allow you to do tax planning and shift tax burdens from the trusts to beneficiaries through the conduit principle (unique feature to trusts), resulting in less taxes payable. With the attack of government on wealth, the effective tax rate paid on a capital asset sold and the profits distributed, which was held in a company (37.92percent), is now more, compared to a trust (36percent).

MYTH: Trusts are expensive.

TRUTH: Be careful who you pay to set up and administer your trust, as certain service providers charge exorbitant fees. Do as much of the administration as you can yourself. It will at the same time ensure that your financial plan is executed the way you planned. Even though trusts should never be set up only to save taxes, by setting up a trust and managing it properly one can save Estate Duty, Capital Gains Tax, Executor’s Fees and Income tax.

Can anyone measure the “cost” of not having a trust when one gets a horrible disease such as Alzheimer’s, without a trusted board of trustees to manage your financial affairs for you? Or even to lose all your assets upon your sequestration, if you own a business, which was liquidated and you signed sureties?

MYTH: You lose control over your assets.

TRUTH: There are ways to structure a trust in such a way that you do not feel that you are giving up full control over your assets. You can be both the founder and one of the trustees, and you can be a beneficiary of the trust, and this will satisfy Sars, other creditors and the Master of the High Court of the legitimacy and lawfulness of the trust.

MYTH: Sars investigates trusts.

TRUTH: Trusts have been used for almost 1000 years, and the principles of a trust are well entrenched worldwide.

Sars has had trusts under the magnifying glass for the past couple of years, because they do not like the fact that trusts enable the postponement - or even the avoidance of - estate duty, since death does not trigger estate duty in a trust.

Trusts will only be investigated by Sars if they are misused and mismanaged.

If a trust is correctly structured and administered in accordance with the trust deed, the Trust Property Control Act, and the common law, Sars will not investigate it.

Phia van der Spuy is the chief executive of TrustEeze.

- BUSINESS REPORT