THE number one wealth preservation rule is to protect your assets. If you have your own business, sizeable investments and/or other assets, then you might want to pay attention. One of the most important reasons to consider a trust is that it will help you to separate your assets from your property investment debt, your business interests, and/or your other financial risks.
Assets owned by a trust do not form part of the insolvent’s estate and therefore, cannot be attached by their creditors. Section 12 of the Trust Property Control Act states that “Trust property shall not form part of the personal estate of the trustee except in so far as he as trust beneficiary is entitled to the trust property”. This would be the case with a discretionary trust where beneficiaries (who are also trustees) become entitled to trust assets when the trustees vest trust assets in such beneficiaries, thereby exercising their discretion, or if trust assets vest in beneficiaries in terms of the trust instrument.
Once income, capital gains and/or assets are vested in a beneficiary, this protection is lost, as it then falls within their estate. Not even a trust instrument provision can permit the ‘reversal’ of such a vesting to retain protection.
A trust, however, should not be seen as a form of blanket protection because there are a number of sections in the Insolvency Act that will allow the trustee of the insolvent estate to claw these assets back into the insolvent estate. Be mindful of quickly creating a trust to move assets away from your personal estate in the midst of a looming sequestration.
There may be issues that arise in respect of the test to determine whether the trust has a lawful object. It has been found that a trust that is aimed at frustrating either the founder’s creditors (Executor Testamentary Estate Boulton case of 1958) or the beneficiary’s creditors (Ruskin v Sapire case of 1966), where an enforceable right to the trust assets has already vested before its creation, will not be valid. A trust found not to have a lawful object will be void or voidable in terms of our law. Where the assets were transferred to the trust while the estate planner was solvent, it would, however, be difficult for creditors to set aside the trust’s actions.
Why is this separation so important?
Some of the risks that business owners experience include potential claims for financial damages from creditors, employees, tenants, customers and even competitors. Even though you might not be directly responsible for the incident that led to the claim against your business or property investment, your personal assets could be used to settle the claim against your property investment or business. This principle not only applies to business owners but also to anyone with a relatively large asset base who is also exposed to any financial risk, such as claims, debt, sureties and so on.
With today’s high rates of divorce and relationship breakups, a trust, if correctly structured and administered, may also protect your assets from claims arising from matrimonial or relationship disputes.
The way you transfer assets is important
The manner in which assets are transferred is relevant when it comes to the extent of their protection. For example, if you transfer an asset on loan account, the amount of such loan account will remain an asset in your estate until the trust fully repays the loan. The implication is that the loan will not be protected from creditors.
The loan is considered to be an asset in your own hands, and it can be attached. Creditors can – if your loan is repayable on demand as per your loan agreement – demand repayment from the trust, and they can then liquidate assets in the trust to ensure that this loan is repaid to them if the trust has no available cash. Over a period of time, as the loan decreases – from repayments – and the asset value increases in the trust, the benefit of asset protection will be established.
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.
Phia van der Spuy is a chartered accountant with a Master’s degree in tax and a registered Fiduciary Practitioner of South Africa®, a Master Tax Practitioner (SA)™, a Trust and Estate Practitioner (TEP) and the founder of Trusteeze®, the provider of a digital trust solution.
*The views expressed here are not necessarily those of IOL or of title sites.
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