This is a bit like asking the cost of a Rolls Royce – if you have to ask, you can’t afford it! But it’s not quite like that. The problem is that if you are too price conscious, you can end up forming a seriously flawed trust and when you later come to us to fix it, our fees will be higher than our fees to form a solid trust in the first place. On Google, we’ve seen “From R499”, click on that and it’s now “From R799”, but then it tells you that is for the trust deed only.…
Trusts and Estate Planning
I guess we all want to leave a decent legacy. It’s probably the only thing that we will be remembered for in a few generations’ time. D’you remember your grandparents? Sure you do. But what do you know of their parents? And their parents’ parents? Of course, you will not be aware of those people who have left a legacy to their descendants, because that’s a different family, but I’m sure you’ve heard of a guy called Nobel? He invented dynamite and left a legacy that we are all aware of. He was born in 1833, so, by my calculations,…
Just as the sale of shares in a company owning mainly residential property is deemed, for Transfer Duty purposes, to be the sale of the property, so too is the sale of a trust that owns residential property. A trust will be recognised as having been sold when there is any change of trustees. So what if it was a shelf trust sold for the purpose of buying residential property? Firstly, we prefer not to sell shelf trusts as there’s double work involved, first to form the trust, then to change it. However, occasionally a client wants to sign on…
If you have the intention of becoming reasonably wealthy, then you should form your trust now, or as soon as you can afford it. The cost is currently R12 400 and you’ll also need a company for R1 980. But why the urgency? The answer lies in s56(2)(b) which allows all natural persons to donate up to a total of R100 000 each tax year free of Donations Tax. Now, you and your spouse may not have R100K just lying around waiting to be donated, but you can still donate (before 28 February each year) and owe the money to…
Yes, you can, despite my having written an article recently stating that this allowance was terminated on 28 February 2018. I was completely suckered by a member of SAIPA – that’s the wannabe institute of junior accountants who have gone through various names in the past trying to sound like professionals. These were CFA mimicking a very proud and respected body in the UK. They got barred from using that name, so they then called themselves CPA, which, in the USA means the same as CA(SA) does here. They got barred from using that name, so then they finally settled…
That only depends on the Trust Deed. There is no legal requirement for a trust to prepare financial statements but some trust deeds include such an obligation along with other unnecessary requirements such as that the trustees must meet at least once a year to consider the financial statements. The problem with stipulations such as these is that if the trustees fail to abide by them they lay the trust open to an interpretation that it is a sham, since they are not taking it seriously themselves. Our advice is to keep the obligations of the trustees to a minimum.…
We have been forming trusts for about 20 years. Many of them are formed with me as the Donor and my wife Helen and I as trustees. They are the put on the shelf to mature and be sold when someone needs a trust urgently or wants an old one. Then we change the trustees, beneficiaries etc. and usually leave me in place as the Independent Professional Trustee. And now, many years down the track, the Johannesburg Master has suddenly decided that the Donor cannot be the Independent Trustee. Not only did it take her and her predecessors about 20…
The decision as to what a trust should own is largely dependent on the main purpose for which it was created. Although most trusts serve both purposes, some are formed principally for estate planning and others for asset protection. Let’s look at each of these – Estate planning Your objective here is to minimise the Estate Duty and CGT, both of which kick in on death. Estate Duty is based on the net value of your estate, whilst CGT is levied on the gain in value of each asset from the date of purchase to the date of death. In…
So, your trust owns investment properties and is liable for 45% tax on the net income. You read my article about how this should have been structured. Is it too late to put it right? Fortunately, it can still be done thanks to s42 of the Income Tax Act. You need to do an asset for share swap. Here’s how it works – You need to slip a company between the portfolio and the trust. Ideally, it needs to be a company that you newly form. Then the first issue of shares is in favour of the trust in exchange…
There’s a simple answer to that one. You don’t! There’s one bunch of attorneys who claim to be experts on trusts. And yet, they will try to convince you that you need four trusts, not just one. According to them you need a family trust to hold your personal effects, a residence trust to hold your primary residence, a share trust to hold your shares and a property trust to hold your investment properties. They argue that this is necessary in order to isolate risks, but they miss the point completely. Actually, I’m sure they know this, but, like Woolies,…
A company is taxed at 28% and a trust at 45%, so it’s a no brainer, or is it? If you own shares in your investment company and you go belly up financially, the shares will form part of your insolvent estate and will be sold. Not good. If your trust holds the investments, they are protected from your creditors, but what about that tax rate? Best is for your trust to own a company which, in turn, owns the investments. Income is taxed at 28% and the investments are protected from your creditors. Now, that’s a no-brainer!
I’ve had a few horror stories lately about people who died intestate. One was a client for whom we prepared a Will, but she never signed it. She died at a young age and her family got nothing of her estate because her future husband had paid lobola and they were therefore deemed to be married. Fortunately, most of her wealth was held by a trust that we had set up for her and her family were beneficiaries of the trust. Another was a professional lady who lived with a very close friend in the friend’s house. The friend died…
Did anyone ever tell you that income splitting was a great idea? Read this before you believe them! There’s one bunch of attorneys who specialise in trusts that punt income splitting through a trust conduit as a great way to minimise tax, but they didn’t think it through properly. Here’s how it works – The trust earns taxable income on which it would be taxed at 45%, but no problem, flow the income through the trust using the conduit principle, and pay it to beneficiaries who are on a low tax rate. Magic! The beneficiaries will pay maybe 18% or…
What happens to the trust income when you retire? Now it’s you that needs the money. In our ideal trust structure, the trust owns the investment company, which pays 28% tax, then re-invests the 72% to build the investment portfolio. Maybe the company must declare dividends to its shareholder, the trust, and these can then flow to you as a beneficiary, like this – Let’s add up the taxes on say, R100 000 taxable income. Take off 28% Income Tax paid by the company and that leaves R72 000 available for dividends which will be taxed at 20% or R14…
Trade inherently holds relatively high risk compared to asset holding, so they should be in separate trust-owned companies. But how do you get the money from one to the other? Many would advise you to have them both owned by a holding company (see the article image taken from such an advisor’s website). The trading company declares its profits out via regular dividends to the holding company, which in turn lends them to the investment company. There’s no Dividends Withholding Tax when the shareholder is another company and the dividends keep the value of the trading company near nil, so…
Your trust should own all of your investment properties for two reasons – To protect them from your creditors, and more importantly in most cases, to protect them from the nightmare taxes that kick in on death. So, how should the trust hold that property portfolio? Like this? You see the problem? It’s that 45% tax that only leaves 55% to be re-invested back into the portfolio. Surely there’s a better way? The solution is simple. We interpose a company between the trust and the properties – With this set-up, the company earns the income, pays 28% tax and has…
Transfer Duty is a relatively simple tax, but it is treated in some very strange ways in the legislation. Here are some examples – As far as I have been able to determine, it is the only tax that is applicable on a transaction between spouses. All others – CGT, Donations Tax, Estate Duty do not kick in at the time of the transaction. If the shares of a company are sold and whose assets are mostly residential property, then this transaction is treated as the sale of the properties and Transfer Duty applies. However, if the properties are mainly…
Every time we prepare a trust deed, we write a will for the client and their spouse, but who should hold the originals? When you sign your Will, try (I know it’s tough) to imagine the events immediately following your death. Grief (you hope), funeral arrangements, financial affairs to sort out, inventory of your estate to be taken ………… Now where the heck is that Will? It happens all too often. Make sure that your spouse and children know (1) who your executor is and (2) where you keep your Will. Ensure that there are two originally signed copies. One…
I had an interesting meeting recently, the results of which ran contrary to my normal views. But there were good reasons. These clients wanted to set up a property investment trust to produce income for their mother who has the money available to invest. They propose to shut the trust down and distribute the properties to the remaining beneficiaries (themselves) when she dies. Normally, my proposal would include the following – 1) The client would be the founder of the trust 2) There would be a company between the trust and the properties and 3) Net rental income would be…
Last week, I wrote how a trust saves tax for property investors. The same applies to entrepreneurs. You’re building your business, and you hope that some day it will provide for your retirement or that you will be able to sell it and invest the money for retirement income. And instead, you die. Damn! You may recall that the two taxes on death are – Capital Gains Tax (CGT) at about 18% Estate Duty at 20% Capital Gains Tax (CGT) You are deemed to have sold your assets to your deceased estate at the moment of death at market value.…