Need for a Trust?
DO YOU NEED A TRUST?
- Your assets (including life policies) exceed R3.5m
- Your assets consists of capital appreciating items
- You have minor children
- You want to control how / which assets are passed on to your heirs (especially in blended families)
- You need asset protection planning
TYPES OF TRUSTS
In South Africa, there are basically three types of trusts. These are:
- living trusts (in South Africa called inter vivos trusts),
- testamentary trusts and
- bewind trusts.
Testamentary trusts are created at the winding up of a deceased estate following a specific stipulation in the deceased person’s will that a trust must be set up. Testamentary trusts are usually created to hold assets on behalf of minor children, since minor children cannot in terms of South African law inherit anything (in the absence of a trust, assets from the deceased estate left to minor children are sold, and the money is paid to them when they reach adulthood).
Bewind trusts are created as trading vehicles providing trustees with limited liability and certain tax advantages.
There are two types of living trusts in South Africa, namely vested trusts and discretionary trusts. In vested trusts, the benefits of the beneficiaries are set out in the trust deed, whereas in discretionary trusts the trustees have full discretion at all times about how much each beneficiary is to benefit.
PARTIES TO A TRUST
The trustees are the custodians of the assets in the Trust, but do not necessarily have an interest in the assets. In order to promote the independence of the Trust, it is advisable to appoint at least one independent trustee
The beneficiaries are the individuals / entities entitled to benefit from the Trust assets or income
- Donor / Founder
Person setting up the Trust
BENEFITS OF A TRUST
The two main advantages of having assets in a trust are:
- Asset protection (Protection of assets from creditors)
In an ideal situation, since assets held by the trust aren’t owned by the trustees or the beneficiaries, the creditors of trustees or beneficiaries can have no claim against the trust (there are exceptions). A common scenario of using living trusts for asset protection is a husband and wife acting as trustees along with a third unrelated trustee. The trust is granted a loan equal to the value of their assets, then the trust buys their assets using the loan, and finally the trust pays off the loan over time.
- Continuity (A trust can span multiple generations)
When any of trustees die, the trust and any assets owned by it, remain unaffected. Upon the death of a beneficiary, only the portion of the trust assets that vests in that beneficiary upon date of death would form part of the beneficiary’s estate for estate duty purposes.
TAX CONSIDERATIONS (FOR TAX YEARS COMMENCING 01 MARCH 2012)
In terms of South African tax law, living trusts are considered tax payers. Two types of tax apply to living trusts, namely:
- income tax – payable at a flat rate of 40% (individuals pay according to income scales), and
- capital gains tax (CGT) – payable at the rate of 26.6% (individuals pay 13.3%).
- estate duty – trusts do not pay estate duty (tax payable by a deceased estate). Trusts may be required to pay back outstanding loans to a deceased estate, in which the loan amounts are taxable with deceased estate.
- The trust’s income can be taxed in the hands of either the trust or the beneficiaries (a valuable tax planning tool).
HOW DOES A TRUST ACQUIRE ASSETS
Assets can be transferred into the living trust by:
- selling it to the trust (through a loan granted to the trust) or
- donating cash or other assets to it (any person can donate R100 000 per year tax free; 20% donations tax applies to further donations within the year).
DISADVANTAGES OF A TRUST
- Additional expenses:
A trust is deemed to be a separate legal entity. As such, the following are required annually:
- Annual financial statements
- Annual income tax return
- Bi-annual provisional tax returns
- Administrative requirements:
- Keep all records (first entry to financial statements) from inception of the Trust to at least 5 years after the trust has been deregistered
- Trustees minutes and resolutions about all transactions to be drafted and retained
- Maintain a separate bank account for all trust cash flows
- Maintain asset register
- Relinquishment of control:
- SARS may deem income back to the donor of the asset if there is not adequate relinquishment of control over the asset
- A court may look through the trust if there is not adequate separation of control between the trustees and the trust assets
- If you would like to speak to someone about setting up a trust please contact us on 078 808 6972