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Trusts and Estate Planning


There are two principle reasons for forming a family trust (known as an inter vivos trust because it is formed during your lifetime).

Firstly, the trust is a valuable estate planning tool as when you die, the trust does not die, so there is no Estate Duty payable on the trust assets and no CGT event.

Secondly, the assets of a well formed and administered trust cannot be attacked by your creditors in the event of your bankruptcy.

This diagram demonstrates both uses of the discretionary trust.

Note that since this article was published, CGT for individuals has increased t a maximum of 18.5%

 Intervivos trusts 750 x 1060


The type of trust that is required is called a discretionary trust and it works as follows –

The founder or donor donates, usually, R100 to the trustees of the trust to be cared for by them for the benefit of the beneficiaries.

Commonly the donor would be a parent or sibling of yours. The reason is subtle and is only relevant if and when the trust distributes fixed property to a beneficiary (see Trap below).

The trustees would typically be you, your spouse and an accountant or attorney. The reason for the professional is that their presence supports the notion that the trustees are an independant body and that the trust is not just an extension of yourself. Also you need a professional such as a director of Harbour and Associates who is knowledgable on tax law and on trust case history to ensure that the trust is properly administered and gives you the maximum benefits.

The beneficiaries would typically be you, your spouse, your children and grandchildren plus others in case the entire family dies before the trust assets have been distributed. We prefer yourself, your spouse and a defined class, being your relations within the first degree of consanguinity and the descendents of any beneficiary. Relations within the first degree are your siblings, your parents and your children (i.e. one step in any direction).

 Trusts structure

The trustees then start to accumulate trust assets by borrowing either from you or the banks to buy shares, fixed property etc. The assets grow in value in the trust and, because the debt does not grow, the net trust assets accumulate.

Although trusts are taxed more heavily than individuals or companies, this really is of little consequence if the planning and administration is undertaken by a knowledgeable professional.

For example, if the trust is to own rental earning property, then a company should be interposed between the trust and the property (i.e. trust owns company and company owns property). Profits are then taxed at 28% in the company and the remaining 72% can be re-invested in more properties (or used to reduce the bond). Without the company, the trust would be taxed on the net rental at 45% and there would only be 55% left over to re-invest.

If taxable income does flow into the trust (which is most unusual), then instead of paying the 45% tax, the trustees may flow the profit through to any of the beneficaries and, provided this is done before the tax year end (February), the profits are taxed in the hands of the beneficiary at what could be a very much lower marginal rate (especially if that beneficiary does not earn much other income). This is known as the conduit principle because the taxable income flows through the trust to the beneficiary as if through a conduit.

If a capital asset or a capital gain is distributed to a beneficiary, then it is the beneficiary who pays the CGT (at a maximum rate of 18.5%) rather than the trust at 36%.

Note that by distributing income or capital gain to more than one low income beneficiary, the income can be made to be quite tax efficient (this is known as income splitting), but beware s7 of the Income Tax Act.

Trap If the R100 initial donation is in cash then the Trust Properties Control Act and the Master of the high court requires that the trust opens a bank account (whenever it first holds cash) and that means bank charges every month, even though the trust is unlikely to ever use the account.

Tip We would make the donation one of something valued at R100 (for example postage stamps). Then the trust avoids unnecessary bank charges. Most drafters of Trust Deeds get this wrong. 

Trap Under certain circumstances, the founder should not be the originator, but rather a parent or sibling of the originator. The reason is technical and relates to transfer duty if the trust should later distribute fixed property to the founder. As this is most unlikely, we usually do not concern ourselves with the possibility as it can cause other inconveniences. 

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


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



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