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Trusts and Estate Planning

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 paid by the company to the mother as an employee’s salary and interest, rather than via dividends and the conduit principle.

However, in this case, we decided on none of the above. Why?

1) Because the trust is eventually going to distribute the properties to beneficiaries, we had to be sure that they were “relations” of the founder as defined in the Transfer Duties Act. The definition is “related within the 3rd degree of consanguinity” If one of the siblings were to be the founder, the question would arise, can he be a relation of himself? If not, then Transfer Duty would be payable on any property distributed to him. So we made the mother the donor.


2) The trust is eventually going to distribute the properties to beneficiaries, so we also had to be sure that it owned the properties. The company could not distribute them. It would have to declare them as dividends in specie to the trust and withhold Dividends Withholding Tax.


3) Now that we accepted that the trust would own the properties, we didn’t want it to be taxed at 45%, so we will use the conduit principle to flow the income through to the mother before the tax year end of February, so that it is taxed in her hands.


So why do they need a trust at all? Why not this?


The mother will lend money to the trust to buy the properties. She will charge interest up to her tax-free limit. This enables the trust to flow only its net rental minus the interest to her as rental income and the balance as interest, so she earns some income (the interest) tax free.

The moral of the story? No “one size fits all”. Always consult an expert.


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