Text: Peter Fairbanks. Article from the June/July 2012 issue of DO IT NOW Magazine.

Financial Times  -  June – July 2012

Trusts are not all doom and gloom and to make this point I refer to my example of the businessman I mentioned in the last issue. He placed all his properties in a Trust in the early ’80s, and then in the ’90s he had six additional Trusts drawn up for his children and the properties were ‘donated’ into these new Trusts.

He believed that they would be seen as donations until the Commissioner ruled against this. So he took his case all the way to the Court of Appeal and got the Commissioner’s verdict over turned. Although it saved him millions, it still cost him half his fortune in legal costs. The crux of this example is that not all of us have the necessary capital or time to battle with SARS, or any other legal entity, to rectify a mistake. In addition a hasty decision just to do something or save a buck can cause a lot of suffering, emotional distress and financial ruin for your spouse and dependants.

So let’s take a look at the practical implications of using a Trust. Simply put, you are tying up your assets and beneficiaries into a legal entity. This is a constant, but change and the parties to this contract are not, as people get divorced, siblings end up not talking to each other, assets devaluate in certain cases, laws and taxes change and 20-years earlier you signed a document without taking any of these situations into account. In all fairness though, who can foresee any of these circumstances happening – none of us get married to end up divorced and we don’t plan to estrange ourselves from our families, or make poor life and business decisions.

One of the most common reasons why many people choose to use a Trust is because of its estate tax benefits when one dies. This is not always the case for the following reasons:

• SARS currently gives you a R3.5 million tax rebate on your estate and whatever you don’t use can be carried over to the remaining spouse’s estate. His or her estate will enjoy an exemption of R7 million on his or her death, but rolling over the exemption also has its pros and cons. Estate duty of 20% is charged on assets that exceed R3.5 million, with the exception of any assets you leave to your spouse.
• Primary properties are exempt from capital gains tax, but in a Trust capital gains are currently taxed at 26.7% as opposed to only 13.3%* in your individual capacity.
• The amount of revenue the receiver collects on estate duties has decreased over the past couple of years for two reasons. Firstly, SARS benefits more from taxing individuals at death and secondly, people are living longer, saving less and therefore don’t have big estate problems when they pass away.
• You should also never assume that whatever you’ve placed in a Trust is safe from SARS. Many an individual has received a nasty surprise when SARS did not find a correlation between the inception Deed of the Trust and the beneficiaries who gained from the Trust.

So if you are one of the 99% of South Africans who cannot afford to retire, no matter how you do the math, it makes no financial sense to place assets in a Trust just to save on estate taxes.

But as mentioned earlier there are many benefits to a Trust when used for the right reasons. To get some pointers on what to do and when you should consider a Trust, I went to a leading accounting firm, IQ Accounting Inc. for some advice, and this is what they said.

)) The most important step when considering a Trust is to approach someone that is absolutely trustworthy and has the necessary expertise in the field of drawing up Trusts.

)) A Trust Deed is crucial to the existence and functionality of the Trust, and the lack thereof is the main reason why most Trusts fall short 20 years down the line.

)) Make sure you have at least one or two independent trustees appointed to the Trust, as the duties of the trustees are onerous.

)) Assets can be protected against creditors.

)) A Trust, especially a Special Trust, is an awesome vehicle to assist disabled persons to maintain their needs. These Trusts are taxed as would be an individual person, but with the added bonus of having a professional trustee assist in the money matters of that individual.

)) A Trust can protect the interests of its beneficiaries, such as a minor child’s income and inheritance, after a divorce.

)) Lastly, a Trust is not expensive to draw up and is easy to maintain, as it can be audited or compiled annually.

For more advice on all your Trust matters, contact Deon Grove at IQ Accounting Inc. on info@iqaccounting.co.za.

Next month we will conclude with an in-depth look at the drafting of Wills and the consequences.

* Inclusive rate for person at a personal tax rate of 40%