A Case for Trust

8/4/2008 10:41:10 PM

The principle of a trust is that the owner of the assets (the donor) places his/her assets (trust assets) in the care of another person (a trustee) for the benefit of a third person the beneficiary. This arrangement is controlled by a trust deed that determines the rights and limitations of the trustee and the beneficiaries.

A trust is ideal for people who are exposed to creditors or the danger of claims from clients or patients. The reason is that assets placed in a trust does not form part of the natural person’s estate and thus cannot be claimed against. It must be said that this does not mean that you can move your assets into trust to get away from the clutches of existing creditors. The trust is used as a vehicle when planning your estate. You don’t set up a trust because you are in financial trouble.

It is important that the trust is set up correctly and therefore the services of a professional are required. The trust must be registered with the Master and a trust deed must be drawn up. As mentioned earlier the trust deed is the most important document in a trust. A Trust must have annual financial statement which is typically a job for a accountant. Make sure that you have at least 2 trustees but preferably three of which at least one is an independent professional. Courts have lately ruled against trust where clear independence of the assets could not be proven.

If you want to transfer assets into a trust you can either do it by donating it, which will attract donations tax or you can lend it to the trust. Presently any individual registered for tax can donate R100 000 per annum without paying donations tax. This arrangement can be used to reduce the loan account over time which will lead to the reduction of ones estate at death and thus lower estate duties. The advantage of transferring the assets now is that you peg the value of your estate since the growth in the value of these assets will occur in the trust.

The type of assets placed in a trust should also be selected carefully. What we refer to as growth assets is ideal for a trust. Therefore assets like shares of a company or the members holding in a Closed Corporation can be placed in a trust. A second property is also ideal for a trust. Investment portfolios which can consist of shares, bonds or money market type investment can also be placed in trust.

The decision to place ones primary residence, the one you are living in, in trust should be taken with care. According to the present treatment of capital gains on a primary residence the owner is entitled to deduct R1.5 million rand worth of capital gain before paying Capital gains tax. This advantage is lost if the property is owned by a trust. This only applies to the primary residence and that is why second properties can be placed in trust without losing a capital gains tax advantage.

Talking about tax it is important to know that trusts has the worst tax scale. Every rand which is earned by the trust whether it is income or capital of nature will be taxed at 40%. No sliding scales like with natural persons and no exemptions. The income and capital gain can however be distributed to the beneficiaries and from this a favourable tax treatment can be of benefit.

A trust can incur costs and therefore it is important that advice is gathered because there is a breakeven point from which a trust starts adding a benefit. What is meant by this is that if the assets warrant the trust it can be worth while using a trust.

It is also important to distinguish between the types of trusts. An inter vivos trust is one which is

created while the donor is still alive. Very often the person whose assets it is will be a trustee of this trust. Most of the discussion in this editorial thus far relate to this kind of trust although the principles also apply to other kinds of trust. This brings us to a testamentary trust. The testamentary trust comes into existence according to the determinations of a will. It means some one has to die before this trust comes into existence which means it caters for the needs of those who inherit without having to pay costs while there is no use for the trust. This type of trust is of use to most people and the size of the estate is not the determining factor. It is especially of use when there are minors who inherit from an estate. The assets can be placed in trust and managed on their behalf until they are old enough to manage their own financial affairs.

As can be derived from the discussion, trusts are a specialized instrument and professional advice should be obtained if one wants to use this. The purpose of this discussion is merely to highlight the purpose and advantages of a trust which even though the tax changes have negatively impacted on their use, is still a useful tool in estate planning and managing ones financial affairs.

Well, till next time keep well. At least we see some light at the end of the economic tunnel. The oil price is falling and the rand is strengthening, all positives for interest rates and economic growth.

Just hang in there.