Including a trust in an overall financial plan has for decades been a popular choice for investors.
But over time the legislation relating to, and tax benefits offered by trusts have changed. Including a trust in a financial strategy, as with most investment and personal finance decisions, depends on each investor’s objectives, personal circumstances, and investment goals. It has benefits and disadvantages and these should be considered with care to make an informed decision.
The assets no longer belong to the founder/donor and control must be relinquished
Different trusts are available for various purposes, but a family trust remains the most widely used as an investment vehicle. A trust is effectively a legal relationship between the founder of the trust, who places the assets in the trust for the benefit of a third person, called a beneficiary. The Trust Property Control Act No. 57 of 1988 (TFCA) forms the framework in which trusts operate. A trust is not a juristic (legal) person, but it is sometimes regarded as having a separate legal identity for example for tax purposes in terms of the Income Tax Act.
The trust assets are placed under the control of a third party who is known as a trustee. Trusts are an effective instrument to transfer assets on through multiple generations for the benefit of beneficiaries. The assets are therefore mostly meant to be long lasting in nature with a long-term investment horizon.
Once assets have been transferred to a trust, they no longer belong to the founder or donor. The assets now belong to the trustees of the trust in their capacities as trustees and are to be managed for the benefit of the trust beneficiaries. The original donor no longer has any discretionary decision-making authority over the assets. If not, the trust may be regarded as a front (sham) and the protection and planning opportunities afforded by trust ownership will be lost.
In the case of Jordaan vs. Jordaan it was ruled that the trust was the founder’s alter ego (founder treated trust assets as his own) and determined that the separation of ownership or control from enjoyment is fundamental in creating a valid trust.
Trustees need to be independent. One of the most important examples in case law in this regard is the case of Landbank vs. Parker where the Court of Appeals ruled that the Master of the Supreme Court must ensure that where the trustees of trusts and all the beneficiaries are related to each other, an independent trustee must be appointed. The purpose of a trust is to separate the enjoyment and control of the assets.
The benefits of a trust
If trust assets are managed correctly, they will not form part of the founder’s estate, but the founder could still enjoy the benefits thereof. Because the assets fall outside of the founder’s personal estate, it will not attract estate duty or capital gains tax upon death. Assets can also be held for the benefit of next of kin while they will not form part of their estates.
Assets belonging to a trust are protected from the founder’s creditors and/or matrimonial disputes.
Should a founder wish to transfer assets that are already personally owned to a trust, the assets have to be sold or donated to the trust. The value of the sale price will remain an asset in founder’s personal estate, but the growth in the value of the assets will take place within the trust. This approach is broadly referred to as ‘estate freezing’.
Should the founder decide to donate the assets to the trust, such founder will be responsible for donations tax at a rate of 20% on all amounts above R100,000. If the asset to be donated is of a capital nature, capital gains tax will also be payable. The assets may be sold to the trust by way of a loan account, but the extent of the trust’s indebtedness to the founder will remain an asset in his/her estate. Where no loan or sale agreement exists, SARS will consider the transaction as a donation. The loan account is usually gradually reduced during the founder’s lifetime by loan repayments, further reducing estate duty liability.
Assets can also be transferred to a trust on death in terms of a will.
When trusts are considered as part of estate planning, cognisance must also be taken of the fact that individuals enjoy estate duty exemption to the value of R3,500,000, and if spouses bequeath their respective estates to each other, the total exemption amounts to R7 000 000. Estate duty only becomes relevant on estates above this value.
