Trust basics

Many of you would like to the know fundamentals of a trust before we get into the detail. So here goes in the form of FAQs

What are the benefits of having a trust?

You'll save as much as 38% of your wealth on death that would otherwise be paid in taxes.

The trust assets are protected from your creitors.

What taxes does the trust pay as a result of my death?

None.

What taxes would my estate pay on my death if I didn't hold my assets in a trust?

Estate Duty on the value of those assets at 20%

Capital Gains Tax on the gain in value of those assets from purchase to death at up to 18%

Potentially as much as 38% of your investment wealth and payable in cash!

What is a trust?

A trust is a separate legal entity run by (usually) two or three trustees appointed by the Founder, the person who created the trust, for the benefit of beneficiaries also nominated by the Founder.

Who needs a trust?

Anyone who is, or aspires to become, a high net worth individual (what I call reasonably wealthy, say R12m and upwards invested).

When should I form a trust?

As soon as you can afford it and can afford the maintenance cost, which is about R4 000 per year.

What is the benefit of forming a trust if I don't yet have the means to populate it with assets?

You (and your spouse) can donate R100K each year to the trust free of Donations Tax. You will not have to find the cash, you will simply owe the donation to the trust. When you are ready to buy assets in the trust, or sell assets to the trust, the trust will already have a sizeable amount of wealth and you won't have to lend the money to the trust, you can simply repay the debt that arose from the donations.

Also, in the event that you are bankrupted, the trust will have equal rights with the other concurrent creditors to claim the amount that you owe to it, so not all of your personal estate will be lost.

Can the Founder be a trustee and a beneficiary?

Yes, and this is almost always the best thing to do.

How does the trust gather wealth?

By holding assets that grow in value.

How do the beneficiaries benefit from this wealth?

The trustees can make awards of assets or income to the beneficiaries.

Can a beneficiary claim a right to an award?

Absolutely not if the trust is intended to protect assets from the Founder's creditors.

Does that mean that no-one can dictate to the trustees on how they administer the trust and distribute its wealth?

Precisely.

Why do I need an independent professional trustee?

This is one of the pre-requisites to ensure that the trust assets cannot be attacked by outside creditors. This principle was firmly established by the Badenhorst vs. Badenhorst case back in 2005. The office of the Master of the High Court is now insisting on this, although they have no authority in law to do so.

Why do you normally define the beneficiaries by class rather than as individuals?

The reasons that we normally have a class of beneficiaries rather than specific individuals are –

  1. If all of the beneficiaries die together, the trust will have no beneficiaries and its assets are then forfeit to the State.
  2. If we nominate specific beneficiaries, we have to submit their personal details and if they are minors, the details of their guardians.
  3. No-one knows what the future holds and to exclude certain fit and healthy people now could prove to be a sad mistake if their circumstances change dramatically.
  4. The beneficiaries of a trust have no claim whatsoever against the trust or the trustees who have absolute discretion as to how they deal with and distribute the trust assets and income.

The Donor or Founder can write a Letter of Wishes to the trustees indicating to them his/her reason for establishing the trust and his/her preferences with regard to the beneficiaries. This letter is not binding on the trustees but acts as a guide.

Can the trustees make an award to one of the trustees?

Yes, provided that trustee is a beneficiary and does not vote on the decision.

Can a trust own fixed property?

Yes, but if the property earns rental income, it is better for a company to own the property and for the trust to own the shares in the company.

Why?

Because trusts are taxed at 45% on the net income (from the rental) whilst companies are taxed at 28%.

Should the trust own my primary residence?

Yes, if you want to protect the property from your creditors and no, if you want to minimise Capital Gains Tax when you sell the property.

Can the trustees change the beneficiaries?

Yes, with the agreement of the Founder, but this is rarely necessary because of the way we draft the Trust Deed.

What happens to the trust when I die?

Nothing. However, if you are a trustee, we will have included a clause in the Trust Deed that gives you (and usually your spouse) the right in your Will to appoint a new trustee to take your place.

How do I move my assets into the trust?

Either donate them and pay Donations Tax at 20% for any value in excess of a total of R100 000 in any one year or sell them on loan account.

What taxes apply when I sell assets to the trust or to the company which is owned by the trust?

Transfer Duty on fixed property.

Transfer Duty on the sale of the shares in a company which owns residential property.

Capital Gains Tax on the gain that you are deemed to have made (as the sale will always be deemed to have taken place at market value).

Securities Transfer Tax on the sale of shares.

Can my creditors claim the debt which the trust owes me as a result of the above sale?

Yes, but they cannot attack the growth of the asset that occured after the sale.

How else can the trust acquire assets?

It (or usually the company that it owns) can borrow money from a bank and buy them, repaying the bonds from the income that the assets earn.

Where can I learn more?

You can read the rest of our blog and/or visit our CEO in Midrand at no charge by following this link 

 

 

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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