Everybody is “up in arms” about the new anti-money laundering and combating of terrorist financing measures introduced which affect trusts. It is interesting to watch how many “so-called” advisers see an opportunity to “make a quick buck” by advising their clients to undo their trust structures, or out of complete ignorance themselves. The accounting and fiduciary industry has a responsibility to give (or obtain) the best advice for their clients and not, in a knee-jerk reaction to the new measures, blindly deregister trusts.
Although, in some instances, estate planners were ill-advised to register trusts in the “old days”, trusts were generally registered as part of estate plans. It takes a lot of effort to properly structure a trust and to effectively move assets into a trust as part of an estate plan. It will certainly trigger a number of costs and taxes (let alone the undoing of an estate plan) to give ill-considered advice.
Estate planners should not lose sight of the purpose for which a trust was set up. The benefit of having a trust as part of your estate plan will in most instances outweigh the extra layer of compliance costs as a result of the new measures.
The following may serve as reminders of the reasons why estate planners may have been advised to register a trust. Do not undo your estate plan if it still makes sense to have a trust, but physically deregister the trust if it never served a purpose, as all trusts, whether dormant or not, fall under the same onerous measures, for which trustees may be fined and/or imprisoned.
Separate your personal assets from your business or property holding
The number one wealth preservation rule is to protect your assets. One of the most important reasons to consider a trust is because 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. However be mindful about how it is structured and how and when assets are moved into the trust.
Flexibility to cater for varying circumstances and events
A discretionary trust is extremely flexible and can be used to take into account any family, financial and legislative circumstances. This means that the trustees can manage the trust’s assets in the best interests of the beneficiaries, at any particular time, by taking into account all the relevant factors at that time. This flexibility caters for uncertainties such as divorce, insolvency, increase in family size or fortunes, and changes to tax legislation, provided the beneficiaries are defined, and the trust instrument is drafted in such a way as to anticipate these uncertainties. A trust also provides assistance for those tricky situations where people marry for a second or third time, and there are children from the previous marriage(s).
Family asset management
A trust can provide a centralised asset management structure, as well as controlled distributions for beneficiaries who are not in a position to manage assets themselves due to prodigality (excessive or extravagant spending). A trust can also provide for joint ownership of indivisible assets, such as holiday homes and farms. The benefit of “pooling” a family’s wealth in a trust is that economies of scale can be reached, which may result in greater wealth growth over generations.
‘Insurance’ should something go wrong with your mental or physical health
In the event that a person may become mentally compromised, a trust should be considered to avoid placing that person under curatorship. A board of trustees, selected by the person, can then look after the financial affairs of that person instead of a curator, who may be a complete stranger appointed by the Court. From a tax perspective, the Income Tax Act makes provision for the creation of a Special Trust, where the trust is created for the benefit of a person who cannot take care of their personal affairs due to a disability, such as a serious mental illness. If you have created a trust during your lifetime and become afflicted by one of these dreadful conditions, your financial affairs would continue as before with persons that you entrust as trustees of the trust managing your affairs.
Preserve your wealth for future generations
If you bequeath your estate to individuals, it may become a case of easy come, easy go. For example, people who inherit, and/or their spouses, may not attach sentimental value towards the inheritance, and may put pressure on their spouses to liquidate the assets in order to go on an expensive holiday. Most people who have accumulated wealth in their lifetimes, or who have inherited wealth, prefer to see their wealth spread beyond the next generation. A trust is the most effective vehicle for the preservation of wealth. A well-run trust allows succeeding generations to participate in, and benefit from, the wealth created in one generation.
Protect other people
Often particular family members (such as people with disabilities) need special attention, and trusts are used to provide funds to look after those family members. Sometimes children have special challenges, which inhibit their ability to manage their own financial affairs. A trust is the perfect solution for such persons. This is also true for minors. Trusts for minors and disabled persons may enjoy special tax treatment.
Life continues for your family after death – no estate freezing
It is wise to arrange your affairs in such a way that when you are no longer here, your personal and financial affairs will continue with minimal disruption. Our heirs, who are usually traumatised by our departure, are then doubly traumatised by having to make decisions on matters that they have little or no knowledge of. An individual’s estate is frozen upon their death. It may take two or more 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. This may be traumatic, especially when couples are married in community of property and their joint accounts are frozen, leaving the surviving spouse without access to any liquidity. In contrast, death does not interrupt the operation of a trust.
Protect your family from liquidity issues resulting from your death
Trusts provide liquidity solutions on death. On death, Estate Duty is payable on the value of the assets and Capital Gains Tax is payable on the growth of assets held in an individual’s hands, whether the asset is disposed of or held in the family. Executor’s Fees of 3.5% plus VAT of the gross asset value of the estate may also become payable. In a trust, Capital Gains Tax is only triggered on distribution or sale of the asset, hence matching tax liability to cash flow and not on anyone’s death. However, Estate Duty and Executor’s Fees will never be payable on assets in trust. For example, a family holiday home intended to be held for multiple generations would be better held in trust. Capital Gains Tax on the growth of the asset would only apply when the asset is actually sold by the trust.
Van der Spuy is a Fiduciary Practitioner of South Africa, a Chartered Tax Adviser, a Trust and Estate Practitioner and the founder of Trusteeze, the provider of a digital trust solution.
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