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Trusts and Estate Planning

Of course, it is only those who expect to become reasonably wealthy that should form a trust, but for them it’s never too soon to start.

You could be forgiven for thinking that the time to form a trust is when your assets (particularly the shares in your company) are about to gain sufficient value that their sale to the trust would result in your having to pay Capital Gains Tax or before the value of residential properties owned by your company grows above R900 000 since the sale of the shares to a trust leads to Transfer Duty as it is deemed to be the sale of fixed property.

But one of the benefits of a trust is Asset Protection. You sell a growth asset (like your company shares) to your trust. Let’s say you form the trust in three years time when they are worth R600 000. The trust doesn’t have any money so now it owes you R600 000. You are still worth R600 000 and the trust is worth nothing (R600 000 worth of shares – R600 000 debt to you), so if your creditors then come along, they can demand that the trust repays the debt (by selling the shares) and you have protected nothing. Of course, as the shares grow in value, the additional value is protected from creditors as they only have a claim for R600 000.

Then you start wearing away the R600 000 by making donations (you and your spouse) of R100 000 each per annum free of Donations Tax and after another three years, the trust effectively owes you nothing as the two liabilites are equal and opposite.

Now, if you start earlier, then you and your spouse could each immediately donate R100 000 a year to the trust. It’s just a book entry, Debit Donations received, Credit Loan account. After only three years, the trust owes the two of you a total of R600 000 plus interest. Why is that so great? Because now it can buy the R600 000 worth of assets from you, those assets are totally protected from your creditors and you don’t have the problem of having equal and opposite loans to and from the trust that arise in the first scenario and can lead to Capital Gains Tax if not handled carefully.


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Looking for even more informative content? Check out the books I have written which have proved to be very popular.

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