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.

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.

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

 

 

Accreditations & Memberships

South African Institute of Chartered Accountants. Designation CA(SA) Engineering Council of South Africa. Designation Pr(Eng)Independent Regulatory Board for Auditors. Designation RA<    Internationally Accredited Financial MediatorsMember of MENSA, the High IQ Society

 

 

 

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Tumi : tumi@harbourassociates.co.za

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