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 interest, rent remains rent, a capital gain remains a capital gain etc, and…
Trusts and Estate Planning
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,…
Most entrepreneurs feel that their company is too small to consider an Employee Share Trust. This is often not the case and there are some definite advantages to consider. The benefits are motivation of staff and improving your B-BBEE rating. Let’s look at them – Motivation We all know how important it is to have dedicated, motivated staff. Now, the very best of staff are not motivated principally by the possibility of reward, which is why any bonus system is unlikely to work. In fact, bonus schemes are generally demotivational because bonuses frequently fall below expectations or have to be…
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…
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 20%). 3) Every natural…
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…
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…
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…
Many of you would like to the know fundamentals of a trust before we get into the detail. So here goes in the form of FAQs What are the benefits of having a trust? You’ll save as much as 38% of your wealth on death that would otherwise be paid in taxes. The trust assets are protected from your creditors. What taxes does the trust pay as a result of my death? None. What taxes would my estate pay on my death if I didn’t hold my assets in a trust? Estate Duty on the value of those assets at…
The Master’s office is really going over the top now. They are suddenly invoking the findings of the Crookes case which was heard in 1956! I think somebody there is studying trust law and trying to make a name for themselves (and I think I know who it is) The matter that had to be decided in the case was whether under those particular circumstances, the trustees and donor could change the Trust Deed without the agreement of any other party. Because of the unusual circumstances is was found that the beneficiaries had to agree as well. This was essentially…
In his 2016 budget Pravin Gordhan advised that there would be changes to the way loans to trusts are dealt with. These proposed changes are now published in the Taxation Laws Amendment Bill 2016. In a nutshell, from 1 March 2017, you should not make interest free or low interest loans to trusts (they don’t mention companies owned by trusts, but I guess they’ll wake up before the Bill becomes an Act). Instead you should charge the official interest rate which is currently 8%. This is a journal entry in the company Dr Interest Paid, Cr Loan account. The interest…
There are three ways of moving assets into a trust and they all have different tax consequences Donation Many people think that this is what they need to do. Problem is you’re only allowed to donate R100 000 total per annum. After that you have to pay 20% Donations Tax so this is not the way to go. Sale This is the normal way. You sell the asset to the trust, or usually a company owned by the trust (the sale price is deemed to be at market value for tax purposes) and take the tax consequences which are usually…
Only if it is badly drafted (or in very exceptional circumstances) The first problem is that most drafters of trust deeds (in fact every one that I have ever come across except those who copy from my trust deeds) will declare the intial donation of R100 or rarely, some other cash amount. The Trust Properties Control Act requires that as soon as a trust receives cash, it must open a bank account, so those trusts have to open a bank account just for the R100! Guess how soon the donor finds himself lending more money to the trust just to…
Estate Duty Estate Duty is charged at the rate of 20% (same as Donations Tax) on the net assets of the deceased estate (including deemed assets). Each person is exempt from Estate Duty on the first R3,5m of their estate. Any unutilised portion of this R3,5m carries over to the deceased’s surviving spouse and is added to that spouse’s R3,5m exemption. Bequests between spouses are free of Estate Duty as are bequests to Public Benefit Organisations. If two spouses die simultaneously or as a consequence of the same event, then the spouse with the smaller estate is deemed to have…