By Remay Olivier, Trust Product Manager
Trusts are very effective vehicles that can assist individuals and families with a variety of asset and beneficiary protection options.
Most notably
When considering trusts as part of estate planning, balancing the purpose of the trust, against the type of asset is always key to determine the outcome. The fact of the matter is that any asset can be owned by a trust. Two pertinent questions are whether it makes sense to own certain assets in a trust; and what is the purpose of the trust? If the founder and/or trustees are clear on what the purpose of the trust is, then determining whether an asset should be purchased in the trust makes sense.
However, many trust planning discussions end when trust founders or donors face the complexities associated with transferring assets into a trust. Assets can be transferred in various ways, each with its own implications that need to be understood.
The following are the options available:
When donating assets to a trust, donors need to consider the possible impact of donations tax. Donations tax (Sections 54 to 64 of the Income Tax Act No. 58 of 1962) is calculated at a rate of 20% on the value of the donation up to R30 million, and a rate of 25% on donations above R30 million. Donations will, however, be exempt if the total value of donations for a tax year does not exceed R100 000 per tax year. Once the R100 000 per year threshold is exceeded a donor is required to pay donations tax on the amounts that exceed the threshold.
Like any other transaction, when selling assets to a trust, the most important consideration should be whether the trust has the necessary funds to purchase the asset. From a trust planning perspective - and especially for newly established trusts - selling assets via a loan to the trust has been a useful solution. However, with the introduction of Section 7C of the Income Tax Act a couple of years ago, selling an asset via a loan to a trust has become more complex, notably due to the requirement to charge interest on the loan at the official rate of interest as defined in the Act.
Whether to donate or sell assets to a trust depends on the circumstances of each person and they will need to consider the purpose of the trust and the type of asset.
By way of an example, where assets are growing rapidly in value - such as in the case of business interests/company shares - transferring assets into the trust whilst the asset is low in value ensures that any further growth on the asset takes place in the trust. A trust in this instance, is an effective vehicle to assist in building wealth outside of an individual's persons estate. This in turn mitigates estate duty and capital gains tax at death as the assets are no longer owned by the individual. While the benefits of estate duty and capital gains tax on the individual's personal estate are factors to consider, awareness of the effect of income tax on any income distribution made from the trust to an individual should be noted.
A simple and effective way to build wealth in a trust over time, is to make use of the annual donations exemption. This is the amount that one can donate, currently R100 000 p.a., before paying donations tax. This exemption applies to all resident taxpayers. Practically this means that you could have multiple donors, donating their full annual exemption to a trust in a tax year - for example a husband, wife and other family members. By making continuous annual donations, many families have created substantial wealth in trusts over time.
When funds are donated to the trust, the trustees can invest all funds received on behalf of the trust beneficiaries. Just like investing as an individual or company, many investment options are available to the trustees.
A popular option for trusts is to use a sinking fund policy as an investment vehicle.
The following are the options available:
Key takeaway
Trusts are very effective asset protection and wealth building vehicles. However, each person interested in transferring assets into a trust, would need to weigh up multiple factors.
FNB International Trustees FNBIT Registration No. 3080. Licensed by the Guernsey Financial Services Commission to conduct Fiduciary Business. FNBIT is a member of the FirstRand Group.
