* Protect the value of growth assets in your estate.
* Protect assets from forced sale by assessing the availability of liquidity in your estate.
* Reduce exposure to taxes such as capital gains tax (CGT) and estate duty.
* Limit estate expenses.
* Ensure the smooth transition of your estate on death.
Remember that it is not always simply about the tax savings or the additional taxes payable on assets transferred to a trust; it is also about a strategy to protect your assets, and to create continuity and liquidity upon your death.
There are also other considerations, such as a contingency plan in the event that you develop Alzheimer’s disease.
Your estate plan should take the following into account:
* Your will.
* Your trust (if you need one).
* All your assets and liabilities.
* “Deemed property”, such as your life policies.
* Liquidity to fund CGT, estate duty and executor’s fees (where applicable).
To build wealth is one thing, but to protect the wealth you created during your life is another.
Trusts have an important role to play in estate planning and will affect your decision in terms of how much risk you are prepared to be exposed to, how much investment you require and how much life assurance you will require. This is because setting up a trust will affect how much estate duty and CGT your estate will pay and the provision you make for your dependants after your death.
A trust may be used to hold and protect personal or business assets. This is particularly beneficial in the event of subsequent liquidation, sequestration or divorce. Trusts may also be used to hold shares in businesses to ensure the continuity of ownership of assets.
Assets that you expect to increase in value over time, assets with sentimental value and assets that you want to protect from creditors should be prioritised when considering which assets to move into a trust first.
On assets transferred into a trust, the growth in the value of assets would be excluded from your estate. This is helpful only if you transfer high-growth assets to the trust.
Historically, individuals were advised to place all their paid-up personal assets in trust to ensure that they were excluded from their estates upon their death. This assumption is only partly true.
If, upon your death, there is a lack of liquidity in your trust, and because in most cases these assets are sold via an interest-free loan account to the trust, the outstanding loan would constitute an asset in your estate, which is recoverable from the trust and included in your estate.
To make matters worse, if the trust is unable to repay the loan, the executor could have the trust liquidated in order to repay the loan before winding up the estate, which might unnecessarily expose other assets that you attempted to protect in the trust.
In the event that any amounts are owed to you by the trust on your death, an option is to bequeath such a loan to the trust in your will, to not expose the trust upon your death as explained above.
You may make use of the R3.5million estate duty abatement, to avoid paying estate duty on such a bequest to the trust; at least up to a loan value of R3.5m.
Since March 1, 2017, with the introduction of the new section 7C of the Income Tax Act, the South African Revenue Service (Sars) will attack any arrangement that attempts to exclude growth in your personal estate through the introduction of a deemed donation on interest-free loans made to trusts. This will have the effect of the estate planner having to pay “death taxes” during his or her life on this potential growth. The tax measures apply to assets that grow over time and to assets that might even depreciate over time.
Before March 1, 2017, it might have made sense to transfer all your paid-up assets to a trust, provided there was some expectation that the interest-free loan could be repaid before your death, or that the trust would at least be liquid enough to repay the loan at your death.
After March 1, 2017, an individual is required to be more selective in terms of which assets are transferred to a trust. The tax benefits associated with these types of transfers are limited, unless you transfer assets into the trust that are expected to have massive growth in value over time.
If a trust acquires an asset itself, without a loan from a connected party to the trust, or acquires an asset at nominal value (such as shares in a new company), the tax will obviously not apply. In order to grow your wealth, it makes sense to place such assets directly into a trust and not first acquire them in your personal name and transfer them into a trust at a later stage - which will then trigger section 7C.
Something that might influence your decision in terms of which assets to transfer into a trust is the consideration of which sentimental assets to preserve in the family for the next generations, as well as those assets that will outgrow any tax cost (so growth greater than the official interest rate plus 1% - currently 7.75%).
The general perception is that trusts are just for the wealthy. Therefore people believe they have to build up wealth before it warrants setting up a trust.
However, it can be a costly exercise to move assets, acquired by you, into a trust at a later stage. The perfect time to establish a trust, as part of your estate plan, is when you start building wealth, in order to avoid unnecessary costs. The truth is that the wealthy set up their trusts before they became wealthy.
Phia van der Spuy is a registered fiduciary practitioner of South Africa, a master tax practitioner (SA), a trust and estate practitioner and the founder of Trusteeze, a professional trust practitioner.