Article by listed attorney: NANIKA PRINSLOO
WHAT IS SO SPECIAL ABOUT A TRUST?
A Trust is a wonderful mechanism to use for various reasons, because it can protect your assets from attachment by creditors; you can save on paying taxes if it is set up and managed correctly, plus you and/or your family can be protected in the case of your death or insolvency. . A Trust is a separate legal entity and the assets in the Trust belong to the Trust and not to the Beneficiaries or the Trustees.
The most important thing to know about a Trust is that it should not incur any debt.
As soon as a Trust incurs debt, it is in the same position as an individual who cannot pay his/her debt: because then the assets of the Trust can be attached by creditors. So always keep the Trust debt free so that it can fulfill its proper purpose otherwise it defeats its purpose.
This article does not leave room to discuss with you the wonderful mechanism that a Trust is, although we trust (no pun intended) that this will give you a good background on the subject. Don’t hesitate to obtain more information from us.
TYPES OF TRUSTS
There are a several types of Trusts, but we only mention two: a Trust that you create while you are alive (a living Trust). It is usually a Family Trust. Another type of Trust is a testamentary Trust, which is created in your Will. This type of Trust is normally created if one has minor children and you want the monies that they will inherit to be managed for them until they reach a certain age. (If minor children inherit monies or assets and there is no Trust created in a will, the monies are transferred to the Guardian Fund managed by the state where it earns very little interest). This type of Trust will only be registered after your death. The principles of the Trusts are however the same.
You will read below that a Trust is created by a donation by a Donor. This only applies to a living, business or bewind Trust. In the case of a testamentary Trust, there is no donation. There is indeed a Trust Deed in all cases.
HOW IS A TRUST CREATED?
A Trust is a separate legal entity and is created by a DONOR who donates money to start the Trust (normally R100). (Except for a testamentary Trust). Any person can register a Trust and you don’t have to be wealthy as the assets in the Trust do not have to be expensive. The person who wants to register the Trust (normally yourself), will be the Donor. The Donor appoints the Trustees and the Beneficiaries (the Donor can also be a Trustee and a Beneficiary) and the Donor decides how the Trust will work. All this information is contained in a Trust Deed, which is uniquely drafted for each Trust. Once signed by the Donor and the Trustees, the Trust Deed is registered with the Master of the High Court, who issues a Letter of Authority with a registration number. Once registered, a bank account is opened for the Trust and the donation of R100 is deposited into the bank account. The Trust is registered for Income Tax and the Trust is then up and running.
HOW DO I GET ASSETS INTO THE TRUST?
Assets can be donated to the Trust by any person (usually the Donor). If you, for example, want to transfer your furniture to the Trust, a donation document will be drafted. It will be signed by the Donor and the Trustees, from which moment the assets belong to the Trust. The accountant of the Trust will make an entry into the books of the Trust and that’s that – the assets then belongs to the Trust. Your creditors cannot attach your furniture as it now belongs to the Trust. Each person can donate R100 000 per year donation tax free, so you can donate any/all of your assets that are purchased for cash to the Trust up to this value.
If the value of the assets are more than R100 000, you can either wait until the following tax year and then donate assets worth R100 000 again, or you can sell the assets to the Trust. (A husband and wife can each donate R100 000 per year donation tax free).
If you want to sell something more valuable to the Trust, a Sale Agreement will be entered into between the Seller and the Trust. If the Trust will owe you the money, a Loan Agreement will be drafted. There are fantastic ways to use the latter method to protect your assets and save money, but will need a discussion as each matter is unique. One needs to also take into consideration the 2016 Draft Tax Amendment Bill's recommendations on interest free loans to trusts.
See latest: Proposed Changes to the Taxation of Trusts
TRUSTEES
There must be at least TWO Trustees (of which the Donor may be one). Three Trustees are better, because should there only be two Trustees and there is a dispute, it can bring the Trust to a standstill as the issue will have to be referred to mediation or arbitration, which is expensive and time-consuming. If two of the Trustees are husband and wife, a Third Trustee must be appointed and such a person should be a professional (accountant, auditor, attorney).
The job of the Trustees is to manage the assets of the Trust on behalf of the Trust. The assets are the property of the Trust and not that the Beneficiaries or the Trustees. Therefore, even if you as a Trustee owe millions of Rands in your personal capacity, creditors cannot attach the assets of the Trust simply because you are a Trustee. If the Trust signed as surety for your debt, yes, then the creditor can attach the assets of the Trust by calling up the surety – but that is a different matter. So, the secret is to not incur debt in the Trust or let it sign surety for anything or anybody or any business for any reason.
If you are a Trustee of a Trust and you owe a lot of money to your creditors, your creditors cannot attach the assets of the Trust as the assets do not belong to you. Ever. (Unless the Trust signed surety for your debt).
BENEFICIARIES
There are TWO types of Beneficiaries, namely INCOME and CAPITAL Beneficiaries.
INCOME Beneficiaries are the persons who will receive an income from the Trust, if there is an income to be received. If everything is structured correctly by professionals like us, there will probably be an income. You can make yourself and your partner or any person you wish to be, income Beneficiaries.
The CAPITAL Beneficiaries are the persons who will get the assets of the Trust once the Trust dissolves. Normally these are your family members. You can be a Capital and an Income Beneficiary and a Trustee, but under certain circumstances it is better not to be. Again, it depends on the circumstances and needs to be discussed. The Donor determines when the Trust comes to an end, or he/she leaves the discretion to the Trustees to decide when the Trust must come to an end. The latter is always the better choice.
TAX SAVINGS – HOW?
Here is one example of tax savings when using a Trust:
R500 000 is received by the Trust. Had the R500 000 be received by your business or by yourself in your personal capacity, you or your business would have paid income tax on the money.
If the Trust pays out the R500 000 it has received by paying R100 000 each to 5 Beneficiaries, nor the Trust nor the Beneficiaries will pay income tax.. (The monies paid out to Beneficiaries must just be under the tax threshold of individual income tax and the Trust will not pay tax because the monies were received on behalf of the Beneficiaries and not for itself).
When you transfer assets that are unencumbered (no debt) to the Trust, growth of the assets takes place in the Trust and not in your personal estate. You will therefore not pay capital gains tax or estate duty upon your death. (When you die, it is deemed that you have sold our assets to your estate. You will therefore be liable for capital gains tax. Should your assets by the time of your death already have been transferred to a Trust during your lifetime, your estate will not pay capital gains tax as you would not own the property any longer and there is no deemed sale of property )
Also, if you kept the asset and it makes your estate valuable, it will mean that upon your death you will have to pay estate duty. If the asset rather vests in a Trust, upon your death you will not pay estate duty as the value of your estate will be too low to attract estate duty.
It is essential that you discuss with us estate planning as there are many ways that a Trust can be used to avoid the big taxes. Lawfully.
DOING BUSINESS THROUGH A TRUST
If you are a member of a Close Corporation or if you own a Company, it is better to give the membership of the CC or the shares in the Company to a Trust. It means continuance should anything happen to you (death or insolvency), as the Trust and the Company in that case will carry on and will be unaffected by your death or insolvency. The assets and income of the business will also be safe from attachment by creditors. In the case of your death, your family will be unaffected because, when a person dies, his/her bank accounts are frozen and it can leave your family without cash flow for a long period. Monies in the Trust will still be available to your family and they can carry on with the business if they want to.
OTHER ADVANTAGES
Each person’s life and the status of his/her assets and set-up is unique. A Trust can play a big role in one’s life and even after death. Estate planning will involve structuring of your assets in such a manner that you and your loved ones are best protected.
This article was written by Nanika Prinsloo of Prinsloo & Associates Attorneys and Conveyancers.
