Trusts and Estate Planning Archives

There are direct costs and there are opportunity costs. Let’s look at the direct costs first. Capital Gains Tax Because you are a connected person in relation to the trust, the sale (you would not want to make it a donation) will be deemed to be at market value and CGT will apply at up to 18% of the increase in value over the base cost (purchase price plus cost of improvements) as if you had sold the house to a third party. But don’t despair! Because this is your primary residence, you are allowed to make a capital gain…

I am often asked whether it is wise to put one’s house into a trust. There are two answers – Yes and No. If you formed the trust mainly to protect assets from your creditors, then you may consider it worthwhile protecting your house in the same way. Be aware that if the house is bonded, then you will have to re-negotiate the bond and that particular creditor (the mortgaging bank) will be on the trust’s side of the firewall, so the house will only be protected from your creditors, not those of the trust itself. Also, if the house…

Your trading company is high risk and makes surplus money. Your investment company is low risk and wants money to invest. How should they sit in a trust structure? Not so long ago, I would have suggested that you use a holding company to create the link between the other two companies, whilst protecting the investment company from the trading company risk. The trading company declares its excess money as dividends to the holding company and no Dividends Withholdings Tax is levied because the shareholder is a company and not an individual or trust. The holding company then…

There are two potential benefits – asset protection and estate planning I’ve dealt with the first in another article, so what about estate planning? Two taxes kick in on your death (or that of your spouse dying second if you have bequeathed everything to each other). Estate Duty at 20% or 25% is taxed on you net assets at the time of death. There’s an allowance of R3,5m each and that is often enough to leave the house untaxed. You are deemed to have sold your assets to your deceased estate at the moment of death…

Our CRM system recently sent reminders to all of our trust clients to donate R100 000 to their trust owned company before the 28th of February. Here’s why – Every natural person is allowed to donate a total of R100 000 each tax year free of Donations Tax (which otherwise is 20%). If you (and perhaps your spouse) donate R100 000 on loan account for the next 5 years, you will then owe the company R500 000 and have shifted R500 000 out of your future deceased estate. Say the company then wants to raise a bond to buy an…

I often get asked what happens to the assets of a trust in the event of a divorce, especially if the spouses are both trustees. The first thing to fully understand is that the assets are owned by the trust (or its company) and not one of the spouses getting divorced. The other spouse can be thought of as a potential creditor trying to break through the firewall protecting the trust assets. His or her attorneys will, (because this is what they learned at University and is about all they know about trusts), try to prove that the trust is…

Trusts are taxed at 45%, but that rarely matters because they should not earn taxable income, and, if they do, it should bypass the trust completely. Here’s how. Provided taxable income received by or accrued to a trust is distributed to a beneficiary prior to the trust’s tax year end (28 February), then it may flow through a pipe, or conduit, directly to the beneficiary without touching the trust at all. The nature of the income is unchanged. That is, a dividend remains a dividend, interest remains…

Does it make sense to donate assets to your trust structure? Oddly enough, despite Donations Tax, it sometimes does. There are two ways to move owned assets into a trust structure. Let’s look at the most common method – 1) Sell the asset on loan account. Because the trust and its company are connected persons to the seller, the transaction will be deemed to be at market value for all tax purposes. Let’s say that the asset cost R4m and the deemed market value is R6m. The seller will pay Capital Gains Tax and, if the asset is fixed property,…

This week, I came across an unusual reason for forming a trust. The problem my client was faced with: My visitor was the second wife in a polygamous marriage in community of property. It appeared that the husband wanted to treat both of his wives equally during his lifetime and upon his death. Accordingly, he had purchased some residential units intended to provide his two wives with income upon his death. Even if all of the properties were equal now, they would not be equal in value at the time of his death, and thus there was the possibility that,…

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…

I often get a call from someone whose creditors or spouse are after them and he or she urgently needs a shelf trust so that he/she can move their assets into it to protect them. That is exactly what trusts cannot do. It’s the word “move” above that is the problem. There are only two ways to move assets into a trust. You can either donate them or sell them to the trust. Let’s look at each of these in turn. Donating your assets The problem here is Donations Tax, which is 20% of the total value of your donations…

With the 2019 Budget speech behind us, Estate Duty has gone from 20% to 25% on the amount by which an estate exceeds R30m. That’s five new reasons for holding assets in a trust. But really? Is anyone who’s sharp enough to accumulate R30m not going to have woken up to the idea of a trust? The answer, amazingly, is yes. There are such people out there. I’m currently finalising a business plan for a client who wants to buy a very profitable 28 year old dealership for, guess, R30m and the seller owns the shares in his company in…

I’ve previously written about the new rules relating to interest free or low interest loans to trusts, but the final amendment changes the game yet again and you could be in for some bad news. Here are the salient points most likely to affect you. 1) The section now applies to trusts or companies in which the trust owns at least a 20% interest. 2) The difference between the interest calculated at the official rate (currently 7,75%) and the interest actually charged is now deemed to be a donation and subject to Donations Tax (currently at…

I get to read lots of trust deeds, occasionally one will be well written, but most are just the usual copy and paste stuff by someone who doesn’t apply his or her mind to the job. Here’s what you should be out looking for – 1) If the founder is your parent and not you, ask the person who drafted the deed why that is. If they tell you it is in case the trustees want to award you, as a beneficiary, a fixed property and because there is some doubt as to whether you are a relation of yourself…

Any natural person can donate a total of R100 000 each tax year free of Donations Tax, so, if you want to protect your household goods and motor vehicles from creditors, buy an old shelf trust. Your first donation would be dated in the first February in which the trust existed, the second a few days later in March and then every March thereafter. You and your spouse don’t have R200 000 floating around for each donation, so you simply record the donations and agree to owe the money to the trust. Then you take a very detailed inventory of…

Most people who come to see me about forming a trust want either just their children or perhaps themselves and their children as the beneficiaries. Is this a good idea? No, and here’s why you shouldn’t do it – If a trust has no beneficiaries, then the High Court has to decide what happens to the trust assets and it sometimes awards them to the State and that means that if you, your spouse and children all die in the same accident (which, unfortunately, is not beyond the bounds of possibility), then JZ and his cronies get another windfall. So…

Some trust advisors advocate having three (and, more recently, four) trusts. Great for them, dumb for you! They want you to buy these trusts from them (and it is amazing how many otherwise clever people fall for it) – 1) Your family trust. This one is to hold your family goodies, like toys-for-boys, jewellery etc. to protect them from creditors and to avoid the taxes on death. 2) Your property trust. To hold your investment properties. 3) Your share trust. To hold the shares in your business and any listed shares. 4) Your primary residence trust. This is their latest idea.

There are six different types of trust sometimes with sub-categories. Here they are – 1) Intervivos Discretionary Trust. A trust set up during the lifetime (intervivos) of the founder and in which he/she gives the trustees absolute discretion to handle the trust assets and income for the benefit of the beneficiaries. This kind of trust is used for asset protection and estate planning. There is a sub-category which is an intervivos non-discretionary trust. This is effective for estate planning, but not for asset protection. The trustees do not have absolute discretion. The Master has recently, with absolutely no authority to do…

The Taxation Laws Amendment Act of 2016 is now a reality. Loans to trusts below the offical interest rate come under the spotlight, but don’t panic! As I advised when reviewing the Bill, the provision applies to loans to a trust by any person or company connected to that person free of interest or at an interest rate below the official rate (which is the repo rate plus 1%). The essential point is that the provisions apply to loans made directly or indirectly to trusts but I took specialist advice and was informed that the word indirectly does not apply to…

Trusts and Estate Planning

What does it cost to put my house in a trust?

If I put my house in a trust, is it protected from creditors?

How to structure your trading and investment companies within your trust

Is there a benefit if I put my house in a trust?

Why you should donate R100K to your trust owned company

Trusts and divorce

How income bypasses a trust using the conduit principle

Donating assets to a trust

Trusts for polygamous marriages

It’s never too soon to form a trust

What a Trust cannot do

Five more reasons why the wealthy must have a trust

Low interest loans to trusts now have some bite

Seven things to look for in a trust deed

Why an old shelf trust can be so useful

Who should be beneficiaries of my trust and why?

Why you don’t need more than one trust

Six types of trusts

New laws relating to loans to trusts