How can a trust protect me from bankruptcy?
Your trust does not protect you, but it can protect your assets.
Let’s take a look at what you own. Probably a house, two motor cars, household goods and furniture and then, if you are building your wealth for eventual retirement, you will have, or plan to have, some investments like listed shares or property. You will also own shares in your business.
When you are declared bankrupt you stand to lose everything you own, but not what is owned by the trust as it is a different “person” entirely. So, in principle, your trust should own everything that you want to protect. That sounds pretty simple doesn’t it? And it is. But what happens if the trust wants to raise a bond to buy a property, or if the trust owns an investment company that wants to raise a bond? The bank will require the trustees to sign surety on behalf of the trust
Now none of the trust assets are protected from the bank if the security is called in! The same would happen if the trust wanted to enter into an Instalment Sale Agreement to buy a car or anything else for that matter.
1st lesson – the trustees must not sign surety unless they are certain that the debt can be serviced (even if the property stands empty or if you lose your job or go bankrupt yourself).
Let’s look at another risk area. The trustees decide they can make some money for the trust by doing a business deal or even going into business. It looks great, then things go pear shaped and the trust runs out of money to pay its creditors. The trust is insolvent and loses all of those other assets that you thought were safe.
2nd lesson. If a trust is going to trade (including renting out property), it must own a company and the company must do the trade. When things go pear shaped and the company is liquidated, the trust just loses its shares (as long as it didn’t sign any sureties).
Now let’s step outside of the trust and into your space. Imagine what happens after bankruptcy. You can still earn a living (hopefully), so you can rent a home to live in and feed your family. So what have you lost? Your pride, your personal possessions and any wealth that you had accumulated outside of the trust.
You can’t save your pride, buy actually, very few people need to know what happened, so you soon get over that. You lost the company that you so carefully built, but hey! maybe this is a great opportunity to try something else – I went teaching at Eden College for two years.
So you still have a job, a rented home and wounded pride. But what about all your treasured personal possessions? You lost them and that hurt like hell.
3rd lesson. Every year, each person is allowed to make donations up to a total of R100 000 free of Donations Tax. So before end February each year, you and your spouse sign a Deed of Donation in favour of the trust. You don’t have to find the cash. You will simply owe it to the trust. Go through your house and carefully draw up a detailed inventory of all of your possessions. Put a value to each one (bearing in mind that their resale value will be quite low), then get the trustees to buy about R200 000 worth of them with the money that you donated. Record their decision and sign a Deed of Sale from you and your spouse to the trust for those specific goods. If the trust submits a tax return, reflect the donations as non-taxable income. Repeat each year. Once the trust has bought all of your personal possessions, keep up the donations, then in the event of bankruptcy, the trust is a concurrent creditor for the accumulated donations.
Should you wish to make an appointment, please feel free to visit Derek’s diary and book a time that suits you.