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Trusts and Estate Planning

So you set up your trust for asset protection and estate planning. Are there any other benefits? Two that I can think of. One I love the other I dislike intensely.

The one I love is that it can be the means whereby one of your companies can qualify as a Small Business Corporation for tax purposes (potential tax saving of R95 000 per annum). In order to qualify, one of the requirements is that the shareholder/member is only a shareholder/member of that particular company. This is a problem if you have other business interests, so what we do is change the ownership of the other companies to the trust, leaving you as the shareholder in only the SBC. Of course, the first option  may be to make your spouse the shareholder of one of the other companies, thereby potentially having them both qualify as SBCs (total maximum tax saving R190 000 per annum!)

The one I dislike is known as “income splitting”. If a trust earns taxable income, then it can distribute that income amongst (low tax rate) beneficiaries and the income will be taxed in their hands and not in the hands of the trust. This can lead to significant tax planning opportunities, which some trust consultants rate very highly. The reason that I don’t like it is that it siphons wealth out of the trust which largely defeats the object of having the trust in the first place. They will argue that the beneficiaries can then lend the after tax money back to the trust but that doesn’t solve the problem that they’ve created, as the wealth stays outside the trust in the form of the debt owed by the trust to the individual.

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