What a Trust cannot do
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 exceeding R100 000 in any one year. So right now you could donate R100 000 of your assets to the trust and feel good about it. But there’s another problem. If you did this knowing that there’s a creditor after you and with the intention of protecting those assets from the creditor, then the courts could reverse the donation and declare it nul and void.
What you can do is buy an old shelf trust and retrospectively donate R100 000 over each of the past few years. The donations must be properly documented and, if the trust happens to be registered as a taxpayer, disclosed as non-taxable income in its tax returns. You may have to recall and resubmit its old tax returns to do this. However, shelf trusts are rarely registered as taxpayers as they are not expected to earn taxable income.
A few hundred thousand rands is not a lot of money, but it may be enough to protect your household goods and your car (essential if you are going to be bankrupt – you’ll need to get to work).
Selling your assets
You and the trust are connected persons in tax law, so any sale will be deemed to be at market value. That means that after the sale, the trust will owe you the full value of the asset, so your creditors will go after the debt and recover the asset from the trust. You’ll have paid Capital Gains Tax on the sale and achieved nothing in return.
You could try buying an old shelf trust and selling the assets, for instance the shares in your company, retrospectively. The ownership of shares in a company is not registered anywhere, except in the share register, which is compiled and filed (usually just an Excel workbook). Nobody can prove that the sale took place on any date other than that in the share register and, because you were not connected persons at the recorded time of the sale, you can name your own selling price and duck the CGT. Someone might question why you sold your assets so cheaply and you’ll have an argument on your hands. This trick is not guaranteed to work, but it may be worth a try.