Trusts for Asset Protection

One 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.

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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").

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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.

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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.

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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.

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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.

Retired

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.

 

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