How much can you trust your trust?

It's not just a question of trusting your trust. It is really how much you can trust your independent professional trustee to get things right and keep them right.

Ever since the Badenhorst vs. Badenhorst case it has been considered essential to have an independent professional (accountant or attorney) on board as a trustee of a discretionary trust whose object (or at least one of them) is to protect the trust assets against external creditors.

But this professional trustee should not be selected just for window dressing (i.e. to give the appearance that the trustees are truly independent of the founder), he has some essential duties to perform.

Firstly, he should review the trust deed and satisfy himself that it does not contain any of the flaws common to trusts drawn up by inexperienced attorneys or accountants (especially the "copy and paste" specialists) and then register an amendment to the trust deed if appropriate.

Secondly, he should keep himself up to date with trust case law so that he can ensure that the trustees avoid new pitfalls - there were two reported cases in the Law Society magazine de Rebus recently.

Thirdly, he needs to fully understand the tax implications and obligations of a trust and how to avoid the punitive tax rates applicable to trusts (all of which are, in fact, avoidable).

Choose the right professional and yes, you can trust your trust. Choose the wrong one and take the consequences.

I specialise in trusts and estate planning and act as the independent professional trustee for numerous trusts.

Trusts for Asset Protection

The other good reason to hold your investments in a trust is to protect them from creditors in the event of bankruptcy. Oh, of course, you'll never be bankrupt will you? Let me ask you something. What is the difference between the type of person who will become a multi millionaire and one who will be a bankrupt. Answer - none! Or quite simply, if you don't want to risk bankruptcy, go get a 40 hour a week job!

So yes, you are at risk. If you're not, then you're probably not going to become the sterling millionaire that you need to be in order to retire comfortably, so you don't need a trust either. (Pssst! I know what I'm talking about, I was a bankrupt Pr(Eng) when I was 40, rehabilitated at 50 and back on the road as a newly qualified CA(SA) at 54).

Here's how it works -

Asset protection 1

You sell your asset (say a R2m income earning property) to the trust at market value, paying CGT and Transfer Duty. The trust has no money, so it owes you the R2m. So you're still worth R2m and the trust is still worth nothing. Give it a few years and the asset is now worth R12m. All else being equal, you're still worth R2m but the trust is worth R10m.

Then shit happens. You're bankrupt. If you hadn't sold the property to the trust, you'd be down the drain for R12m, but if you got it right, you're only down for R2m, the rest is safe -

Asset protection 2

The assets of a properly constituted and properly administered trust are not available to your creditors as you do not own them. It's as simple as that. You and the trust are not the same person so if you go man-down, the trust doesn't go with you. The key words here are "properly constituted" and "properly administered".

Notice that the trust does not protect the original value of the asset (R2m), only the growth (R10m).

Don't think for a moment that you "own" the trust, you don't. The trust assets are held by the trustees for the benefit of the beneficiaries and not by you for your or anybody else's benefit.

There's a very famous case of Badenhorst vs. Badenhorst that illustrates this well. Mr and Mrs Badenhorst were in the process of divorce. She wanted half of his assets but he pointed out to her that he didn't have any. "Oh yes you do. they're in your family trust and I want half of them!". They ended up in court and she won! She (the creditor), pierced the firewall that normally protects trust assets. How did she do it? Well, here's a brief summary (not his actual words) of what the judge said -

"I find that this so called trust is a sham. It is nothing more than Mr Badenhorst's alter ego (other self). I say this because there are only two trustees, Mr Badenhorst and his brother, they never had meetings, they never kept minutes and Mr Badenhorst bought, sold and used trust assets and generally treated them as if they were his own. If I had seen that there was a third trustee, an independent professional attorney or accountant, I may have come to a different conclusion."

From that day onwards, all properly administered family trusts have an independent accountant or attorney as one of the trustees and it is his job to ensure that all decisions of the trustees are properly recorded. He should also be familiar with the tax and case law as they apply to trusts.

Get it right and you can rest assured that assets held by your family trust will be safe. Get it wrong and you'll go the way of Mr Badenhorst.


Other posts on trusts -

How a trust buys and holds assets

Trusts for Estate Planning

Should you wish to make an appointment, please feel free to visit Derek's diaryand book a time that suits you.


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Trusts for Estate Planning

I meet so many people who have a family trust (often three depending on who they bought from) gathering dust in a file somewhere. Often the trusts were bought after attending a seminar on the subject, but because there was no follow through they never got to put the trust(s) to the use for which it was intended.

So let's explore one good reason for forming a trust during your lifetime (it's called an inter vivos trust meaning "during life").

When you die, you'll probably leave everything to your spouse and there will be no estate duty and no capital gains tax. The problem arises when your spouse dies. We'll call her "she" because men generally don't live as long as women, but it works either way. On her death, she will be deemed to have sold all of her assets to her estate at the moment of death at market value and if that means she made a capital gain on some of them, then CGT will be levied at up to 13 1/3%. In addition a 20% Estate Duty will be levied on her net assets at the time of death. There are some allowances, but let's assume that they get used up on non-investment assets like your home and your holiday home.

In simple terms, if you bought a house for rental that cost you R500 000 and it is worth R2 500 000 when she dies, then her estate will pay about R750 000 in taxes on that one asset! And, of course, she didn't actually sell the house, so there's no cash to pay the taxes.

You can avoid this problem by forming a trust and having the trust own the investment property instead of you.

When you and your spouse die, your trust does not die, so your death is not a tax event for the trust.

Got it? A trust does not pay Estate Duty because it is not a person and it will only pay CGT when it sells the property (or distributes it to a beneficiary, which it is not likely to do).

So now go and form a trust (or come to us and we'll do it for you). What next? Sometimes it is OK to sell your investments to the trust, but that could mean that you have to pay some taxes (CGT and transfer duty). If the taxes are low, then we would probably do it right away. If not, we would wait until the next investment came along and buy that in the trust rather than in your own name. Or maybe you would sell an investment, lend the money to the trust and let the trust buy another investment with the borrowed money.

It does need a bit of management doesn't it? But it is well worth it.


Other posts on trusts -

Trusts for Asset Protection

How a trust buys and holds assets

Should you wish to make an appointment, please feel free to visit Derek's diaryand book a time that suits you.


Need a shelf company or CC, a tax clearance, B-BBEE certificate or VAT registration? We offer a wide range of such services.


The other beneficiaries

Who should be the beneficiaries of your family trust?

Lot's of clients say that the trust is for their children as beneficiaries, but that is fundamentally unsound. There's no question in my mind that the beneficiaries must include the client and their spouse as well as their children. The reason is that you simply do not know what the future holds, so be ready to deal with the unexpected. You might be quadraplegic this time next year! You can't possibly predict that, but it happens to some, maybe you.

OK so now we've got the immediate family on board - mum, dad and the kids. Is that enough? A most definite "No". Why? Because mum, dad and the kids tend to travel together and people travelling together sometimes, regrettably, die together. No, of course we don't want to contemplate such a tragedy, but let's not be silly either. The problem is that the assets of a trust which has no beneficiaries are foreit to the State and JZ has had his fair share already. So before we put more food in the trough, let's appoint at least two more beneficiaries. Probably siblings of mum and dad or some other fairly close family members.

Don't worry, the beneficiaries of a trust have no claim whatsoever, against the trust so you're not watering down the goodies, just keeping them away from JZ. This is exactly the same as saying that the trustees have absolute discretion in how they deal with and distribute the trust assets and income.

The only influence that the beneficiaries can exert is if they feel that the trustees are not fulfilling their fiduciary obligations towards the trust (in other words that they are acting for the benefit of someone other than a beneficiary). They can take the matter to the courts. But they cannot claim any trust assets or income.

Need a trust, a shelf company, a tax clearance, B-BBEE certificate or VAT registration? We offer a wide range of such services.

How strong is the trust firewall against creditors?

There's a firewall between your creditors and the trust assets, but how strong is it? This gets tested in the courts relatively often and two cases were reported in De Rebus, the Law Society magazine recently. In both cases the firewall held and quite rightly because these trusts were properly constructed and properly administered.

The first case was the classic - a divorce. Both the husband and wife were trustees and beneficiaries and her attorney sought to get the trust assets included in the accrual calculations. He claimed that the husband had treated the trust as his alter ego (other self). This became a favourite argument after the famous Badenhorst vs Badenhorst case which Mr Badenhorst lost, so any attorney worth his salt will have a crack at it even if his argument has no real merit (of course he won't tell his client that). Interestingly, the other trustees joined with the wife in the claim for accrual, which was pretty stupid as the lot of them had costs awarded against them. I've said it over and over - the trustees have absolute discretion which means that the beneficiaries have no claim whatsoever against the trust assets or income, but then I'm not an attorney whose job it is to take on a case whether or not it has merit.

The second case was also argued on the alter ego issue (surprise surprise) and that the trust was a sham (also taken from the Badenhorst vs Badenhorst case - I guess they teach that one at law school). Our hero went into bankruptcy and the liquidators tried to claim the trust assets as part of his insolvent estate. The application was dismissed with costs and again, quite rightly so. What a waste of the court's time and the creditors' money. But I bet the attorney and the advocate enjoyed pulling out their university textbooks!

Always have an independent professional (attorney or accountant) as one of your trustees and be sure to document all resolutions of the trust, making sure that they are, in the opinion of the trustees, for the benefit of none but a beneficiary or beneficiaries. Do that and with a well crafted Trust Deed, you're on firm ground.

Need a trust, a shelf company, a tax clearance, B-BBEE certificate or VAT registration? We offer a wide range of such services.

Ruling from the grave

I get lot's of people (always men, oddly enough) who are very concerned about what will happen to all their hard earned wealth once they are dead and no longer able to act as trustee for their trust.

Well, the first thing to understand is that when you're dead, you're dead.

The second thing is that you don't know in what way circumstances may change after your death. The worst thing you can do is to tie everybody's hands so that when a real need arises they are not able to fulfill it simply because you wanted to rule from the grave.

The best solution that I can offer is -

1) We provide in the trust deed that our client, who is almost invariably a trustee, has the right to appoint a succeeding trustee in his/her will. Choose this person carefully!

2) The donor can write a letter of wishes to the trustees indicating what he/she would like them to do under various circumstances. This letter is a private document and must have no legal standing whatsoever as if it did, it would destroy the trustees' discretion together with the firewall that separates the donor's creditors from the trust assets.

3) The other option is to provide that after the death of the donor, the trust ceases to be a discretionary trust and the trustees become responsible to act strictly in accordance with the directions of the donor (according to his/her will). Under these circumstances, there is no firewall between the beneficiaries' creditors and the trust assets and that could be disastrous.

Need a shelf company, a tax clearance, B-BBEE certificate or VAT registration? We offer a wide range of such services.

Taxes on trusts

SARS have brought out a new tax return for trusts (the ITR12T). There's bound to be more pub talk about SARS clamping down on trusts, but the pub experts simply pass on hearsay and never actually take the trouble to find out the facts.

The reality is that there's nothing to be concerned about here. All SARS want is the following -

1) The trust will have to give proper details of all transactions during the year - no big deal unless you're Julius Malema maybe.

2) Details of all parties contributing to the trust. Again no big deal except for the likes of JM.

3) Full details of all benefits enjoyed by beneficiaries during the year. This has always been necessary.

And that's about it. The only effect is that it will take us longer to do the return so you'll have to pay more, but then what's new? And in any event most of our trusts are dormant for tax and do not therefore require tax returns to be submitted, but I wonder whether SARS will still allow us to make trusts dormant for tax if they do not have any transactions? I doubt it somehow and that will mean that we'll have to submit two nil provisional returns and one nil annual return for each tax year and that will again push up the costs.

Oh, there's another thing that may be a real problem. They want us to make sure that all of the contact and banking details are up to date and there's the rub. Most trusts that we form do not have (or need) bank accounts. If SARS now insists on one then that will raise two problems -

a) You'll be paying about R85 per month bank charges just to have any empty bank account and

b) Confirming banking details at SARS is an absolute nightmare. One of the trustees will have to go to SARS (I hope it's not me!), wait for anything from 3 hours upwards and then hope that nothing goes wrong when he gets to the counter. I know, I had to go on two consecutive days (about 7 hours total waiting time) to have my banking details verified. However on most IT12s there's an option to state that you don't have a bank account, so hopefully that same option will be on the new form.

Need a shelf company, a tax clearance, B-BBEE certificate or VAT registration? We offer a wide range of such services.

What happens when you retire?

We've figured out how a trust should hold investment property, but what happens when you retire? Is that still the best structure?

Remember that we had the trust owning a company which in turn owned the property portfolio? That was great, because the company paid tax at 28% and then re-invested the net income back into the portfolio to build its wealth. But when you retire, you want the income to flow out to you (that's why we set it all up in the first place). The obvious way is that the company pays a dividend to its shareholder (the trust) and the trust distributes this dividend to you. Problem is the Dividends Withholding Tax (DWT) of 15%. This has the effect of pushing the total tax to about 38,5% which is pretty steep. Take a look at it on the right hand side below.


We can't undo the structure without paying CGT and Transfer Duty, but is there, nevertheless, a better way of getting the money out?

Yes. There it is on the left hand side. You and your spouse (who are both, presumably, on a relatively low marginal tax rate, having reached retirement) must be employed by the company and earn a salary. You must both earn interest on the loans that you've made to the company over the years (that's just a part of the long term planning that we undertook way back). Interest is tax free up to about R5 000 per month (between the two of you and assuming you are both over 65 years old). That means you need say, another R35 000 per month after tax, or R17 500 each. The first R17 000 per month of your combined income will be tax free and the balance will be taxed at 18% if you get everything right. That's an overall tax rate of 11%. Not bad for R40 000 after tax!

Be careful, you must both be actually working for the company to help it earn its taxable income (rent). For example, bookkeeping, rent collecting, tax returns, engaging and supervising maintenance companies etc. otherwise your salaries will not be allowed as a tax deductible expense in the company.

Should you wish to make an appointment, please feel free to visit Derek's diary and book a time that suits you.


Need a shelf company or CC, a tax clearance, B-BBEE certificate or VAT registration? We offer a wide range of such services.


How a trust buys and holds property

Firstly, how does a trust get to own assets (apart from the miserable R100s worth that you donated to it)?

It starts off with nothing, so in order to buy investments it must borrow the money. There are two sources - you or the banks. Generally, the banks tend to be reluctant to lend to trusts, so although you may get lucky, the normal source is you. You could perhaps borrow from a bank and then on-lend to the trust. Or you could stand surety for the trust's borrowings from the bank. Either way, if things go wrong with the trust's investments, you will be in the dwang for the borrowed money, but then, who said life is without risk?

You don't have to charge the trust interest on the loan, but often it is a good idea to do so as if you did not borrow the money, then you can earn up to R23 800 interest (2014) free of tax and the interest is tax deductible in the trust, alternatively, you can set off the interest you are paying against part of the interest earned so that it is not taxed and then an additional R23 800 will also be tax free.

When the trust buys the investment you have to consider whether it should own it directly or through a company (or CC). In general it should own income earning investments via a company. So trust owns company, company owns investment. The reason is that the income earned by the company is taxed at 28% before the company can re-invest it whereas if the trust earned the income directly, it would be taxed at 40% before it could re-invest it. Here's a diagram explaining the two approaches -

Owning property

Don't worry about these technicalities, just get professional advice or do what I say. The only proviso is that this is not always the best answer. For one thing, it may depend how far you are away from retirement and whether you plan to build the wealth of the trust or siphon off the trust income for your own use. Of course, there's an additional cost to maintain a company, so that has to be factored in as well. At least companies of this nature no longer need to be audited so that has cut the cost dramatically.

Oh! and don't let the person who drafts your Trust Deed say that the trust must be audited. Drafters of Trust Deeds often leave this clause in when they cut and paste from a previous client's trust deed. I know, some of them actually prepare original documents, but most of them, by their own admission, are "cut and paste" specialists. I once reviewed a trust deed that had been prepared for a client by one of the big banks. I recognised it - it had been drafted by me for my client's father! The bank had changed a few bits, but even the headings and font were mine. Did I sue them? No, but I was flattered!

Should you wish to make an appointment, please feel free to visit Derek's diaryand book a time that suits you.


Need a shelf company or CC, a tax clearance, B-BBEE certificate or VAT registration? We offer a wide range of such services.

Signing surety

Of course none of us want to sign surety for someone or something else's debt, but there are times when it is unavoidable.

Typically, you would have to sign surety for -

Your company's overdraft facility

Your company's leases and instalment sale agreements

Your trust's property company's mortgage bond agreements

All of the above are unavoidable and are not too onorous. After all, you've protected your growth assets against your possible bankruptcy by holding them in a trust so if the surety is called and you go bankrupt as a result, well, at least the trust assets are safe (except, of course, the asset that secured the debt).

Your primary residence will be at risk, but that was a decision you took when you decided not to hold it in the trust.

But you must NEVER, as a trustee, sign surety for anyone outside of the trust. Not for you, not for your wife, not for your kids. Why not? Because if they go bankrupt, the trust's assets will be forfeit to their creditors and that defeats the whole asset protection purpose of the trust.

Here's a simple diagram that illustrates the point -


Why not come along to our Master Class on Trusts and Wealth Management? Learn how the experts build and protect their wealth and avoid Estate Duty and CGT on death.

Need a shelf company, CC or trust? We've got them, including shelf Inc and NPC companies.

Income Splitting

Some advisors will tell you that you can use trusts to save loads of tax by "income splitting". Here's how it works -

Income splitting

Instead of leaving the income in the trust and paying 40% income tax, the income is awarded to beneficiaries (before the end of February) and will be taxed in their hands at their marginal tax rate. If their rate is low, then the tax saving is significant.

Yes, this is sometimes the right way to go, but normally we would want to keep the income in the trust and use it to build its investments (for your retirement), so taking the income out would be counter-productive. The better way is to have the trust own a company and the company to earn the income and be taxed at 28%.

Again, some trust advisors will tell you to take the income out, splitting it as above, then have the beneficiaries lend it back to the trust to be re-invested. But what they fail to recognise is that the wealth is still held outside the trust in the form of the debt owed by the trust to the lender. Not good. And of course, if the scheme gets too complicated it will fail simply for lack of maintenance. I've never yet seen one of those complicated arrangements working in practice.

Also s7 of the Income Tax Act and similar sections in the other tax acts can negate these arrangements and cause the income to be taxed in the hands of the person whose income producing resource is owned by the trust.

Why not come along to our Master Class on Trusts and Wealth Management? Learn how the experts build and protect their wealth and avoid Estate Duty and CGT on death.

Need a shelf company, CC or trust? We've got them, including shelf Inc and NPC companies.

Need a trust for immediate use, a shelf company, a tax clearance, VAT registration or B-BBEE certification? We offer a very wide range of such services.
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