Trusts Archives

Trusts are taxed at 45% and their CGT rate is 36%. That’s why I so often hear that “SARS is targeting trusts”. So, how is it that trusts are one of the main instruments for saving tax? Firstly, no properly structured trust should ever earn income tax or capital gains, so the above two taxes are totally irrelevant. How is that? A trust should only own shares in companies, and it is the companies that make the profits and pay the taxes, not the trust. So we’re dealing with 27% Income Tax (when the new rate kicks in) and 21,6%…

I read a paid-for article this morning. It was advertorial by Sanlam Private Wealth and written by one of their trust “experts”, Christine Bornman. It was all about how a discretionary trust protects a legacy through succeeding generations by preventing the future beneficiaries from “looting” the legacy. It cites the well known fact that wealth bequeathed to your children is unlikely to survive beyond about two generations. So build it in a trust and bingo! problem solved. Not so, say I. As the article points out, your succeeding trustees are most likely to be your descendants (along with a few…

The vast majority of South Africans should not form a family trust. They fall into five categories. So, if you fall into group 1 or 2 below or all of groups 3, 4 and 5, don’t waste your time, energy and money. Don’t form a family trust if – You are not expecting to be reasonably wealthy (having income producing investments of R12m upwards) by the age of 65 or You cannot afford the fees to pay for a professionally designed Trust Deed or You don’t care if SARS takes between 32% and 60% of your wealth when you die…

This is a bit like asking the cost of a Rolls Royce – if you have to ask, you can’t afford it! But it’s not quite like that. The problem is that if you are too price conscious, you can end up forming a seriously flawed trust and when you later come to us to fix it, our fees will be higher than our fees to form a solid trust in the first place. On Google, we’ve seen “From R499”, click on that and it’s now “From R799”, but then it tells you that is for the trust deed only.

We have been forming trusts for about 20 years. Many of them are formed with me as the Donor and my wife Helen and I as trustees. They are the put on the shelf to mature and be sold when someone needs a trust urgently or wants an old one. Then we change the trustees, beneficiaries etc. and usually leave me in place as the Independent Professional Trustee. And now, many years down the track, the Johannesburg Master has suddenly decided that the Donor cannot be the Independent Trustee. Not only did it take her and her predecessors about 20…

The decision as to what a trust should own is largely dependent on the main purpose for which it was created. Although most trusts serve both purposes, some are formed principally for estate planning and others for asset protection. Let’s look at each of these – Estate planning Your objective here is to minimise the Estate Duty and CGT, both of which kick in on death. Estate Duty is based on the net value of your estate, whilst CGT is levied on the gain in value of each asset from the date of purchase to the…

So, your trust owns investment properties and is liable for 45% tax on the net income. You read my article about how this should have been structured. Is it too late to put it right? Fortunately, it can still be done thanks to s42 of the Income Tax Act. You need to do an asset for share swap. Here’s how it works – You need to slip a company between the portfolio and the trust. Ideally, it needs to be a company that you newly form. Then the first issue of shares is in favour…

There’s a simple answer to that one. You don’t! There’s one bunch of attorneys who claim to be experts on trusts. And yet, they will try to convince you that you need four trusts, not just one. According to them you need a family trust to hold your personal effects, a residence trust to hold your primary residence, a share trust to hold your shares and a property trust to hold your investment properties. They argue that this is necessary in order to isolate risks, but they miss the point completely. Actually, I’m sure they know this, but, like Woolies,…

A company is taxed at 28% and a trust at 45%, so it’s a no brainer, or is it? If you own shares in your investment company and you go belly up financially, the shares will form part of your insolvent estate and will be sold. Not good. If your trust holds the investments, they are protected from your creditors, but what about that tax rate? Best is for your trust to own a company which, in turn, owns the investments. Income is taxed at 28% and the investments are protected from your creditors. Now, that’s a no-brainer!…

Did anyone ever tell you that income splitting was a great idea? Read this before you believe them! There’s one bunch of attorneys who specialise in trusts that punt income splitting through a trust conduit as a great way to minimise tax, but they didn’t think it through properly. Here’s how it works – The trust earns taxable income on which it would be taxed at 45%, but no problem, flow the income through the trust using the conduit principle, and pay it to beneficiaries who are on a low tax rate. Magic! The beneficiaries will pay maybe 18%…

What happens to the trust income when you retire? Now it’s you that needs the money. In our ideal trust structure, the trust owns the investment company, which pays 28% tax, then re-invests the 72% to build the investment portfolio. Maybe the company must declare dividends to its shareholder, the trust, and these can then flow to you as a beneficiary, like this – Let’s add up the taxes on say, R100 000 taxable income. Take off 28% Income Tax paid by the company and that leaves R72 000 available for dividends which will be taxed at 20% or R14 400.

Your trust should own all of your investment properties for two reasons – To protect them from your creditors, and more importantly in most cases, to protect them from the nightmare taxes that kick in on death. So, how should the trust hold that property portfolio? Like this? You see the problem? It’s that 45% tax that only leaves 55% to be re-invested back into the portfolio. Surely there’s a better way? The solution is simple. We interpose a company between the trust and the properties – With this set-up, the company earns the income, pays 28% tax…

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…

Last week, I wrote how a trust saves tax for property investors. The same applies to entrepreneurs. You’re building your business, and you hope that some day it will provide for your retirement or that you will be able to sell it and invest the money for retirement income. And instead, you die. Damn! You may recall that the two taxes on death are – Capital Gains Tax (CGT) at about 18% Estate Duty at 20% Capital Gains Tax (CGT) You are deemed to have sold your assets to your deceased estate at the moment of…

Only beneficiaries can receive benefits from a trust, so it is important to know who can and cannot be beneficiaries. Beneficiaries can be defined by name. For example, “David Marks, Peter Jones, Sally Abrahams” etc. Or as an identifiable class of people. For example, “Any child born of or adopted by David Marks”. Another Trust can also be a beneficiary and again this could be defined by Trust name and number or by identifiable class such as “Any trust of which David Marks is a beneficiary”. A Company or CC can be a beneficiary. This could be defined by name…

In theory, yes you could, but in practice that would be a very silly thing to do. Perhaps the best way to illustrate this is that about 15, maybe 20 years ago, I studied trusts very carefully and wrote a trust deed template for use with all future clients. That template has served me well, but because trust case law keeps changing, the requirements of the Master of the High Court keep changing and because I keep thinking of subtle but important little tweaks, I am constantly changing the template. Now if I, recognised as one of the country’s…

In a word, No! So what do we mean by the Asset Protection function of trusts? One important function of a living trust is to protect assets from your creditors if you should be bankrupt, or even if you should be attacked by your creditors. There are three important things to remember – 1) The trustees must never sign surety for any of your personal debts, because the firewall would break down for that creditor. 2) If the creditor is on the trust’s side of the firewall (such as when the trust takes out a bond), then the related assets…

I often get asked “If assets are owned by my company, are they protected from my creditors?”. The answer is usually no. Why? If you own the shares in the company, then the shares are assets in your name which can be attacked by your creditors. If they get your shares, they get the assets. So no protection there. If, on the other hand, you own shares in two companies, the creditors of the one company cannot attack the assets of the other company simply because you’re the shareholder of both. The “Limited” in (Pty) Ltd means that the shareholder’s…

I was recently asked this rather interesting question and my response was “Yes, most definitely”. Why? My reply stands on two pillars – Firstly, the capital which would be an asset of some kind, such as fixed property or shares in a company, has not been distributed, it is either still held by the trust or has been disposed of by the trust. Either way, that’s a separate transaction from the Capital Gain. The separation of the capital gain has not changed the asset. It is still a piece of fixed property or it is still the same shares. Secondly,…

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…

Trusts

How can a trust save on tax?

How a trust can protect your legacy

Who should not form a trust?

How much does it cost to form a family trust?

The Master no longer allows the trust founder to be the independent professional trustee

What should my trust own?

Why do I need more than one trust?

What is better to hold investments, a company or a trust?

The conduit principle and income splitting

How to draw income from your trust when you retire

How your trust should hold investment property

When should you use the conduit principal to draw funds from your trust?

How trusts avoid taxes for entrepreneurs

Who can be a beneficiary of a trust

Can I form my family trust myself?

Can a trust prevent bankruptcy?

Can a company protect my assets?

Can a capital gain be distributed to income beneficiaries of a trust?

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