Trusts

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Trusts

A Trust is a contract in terms of which a donor (also known as the settler) transfers certain assets to a trustee or trustees to be administered for the benefit of beneficiaries.

The trustees will have no beneficial interest in the trust property and are responsible for managing the trust assets in terms of the powers granted to them in the trust deed.

The true legal position of trusts is not clear because Roman Dutch law, upon which South African law is based, does not recognise the concept of a trust. The law relating to trusts has been imported from English law. Notwithstanding the legal uncertainty, practically, trusts are part and parcel of our law. They are recognised by the tax authorities and a number of sections of the income Tax Act are devoted to te taxation of trusts.

Trusts may be devided into two categories, testamentary trusts and inter vivo trusts. Testamentary trusts are trusts established in terms ofpersons will. An inter vivo trust is one established during persons lifetime in terms of a contract known as a trust deed. This is the type of trust that is normally used when buying a property. Trusts can be used for estate planning purposes.

Advantages from an estate planning point of view.

It enables the founder (or planner) to dispose of his assets.
The beneficiaries need not have vested rights to the trust assets.
The trust is not a natural person and will therefore continue to exist indefinitely if necessary.

These advantages allow a trust to be established by a planner into which he can sell his assets. He can retain de facto control of the assests held in the trust and protect the trust assets from his creditors and from the creditors of the beneficiaries. In additon, his descendants can enjoy all the benefits of ownership of the assets without having to suffer the consequences of ownership in hte form of estate duty or even Capital Gains Tax. With proper tax planning it is possible that the founder as well as the beneficiaries may benefit from an income tax point of view.

Property transfer duty:
On Immovable Property (on or after 23 February 2011)
Payable by natural persons and legal entities:
Property value               Rates of tax
R          0 - R   600 000        0%
R   600 001 - R1 000 000                  3% on the value above R600 000
R1 000 001 - R1 500 000                  R12 000 plus 5% on the value above R1 000 000
R1 500 001 - and above                R37 000 plus 8% on the value above R1 500 000

Switch property ownership from yourself, as an individual, to a trust structure
If you have considered changing the ownership of your property, you should definitely consider transferring it to a trust. There are numerous reasons for this and to mention a few would be protecting your assets from malicious persons and the government, plan your estate and save all the death taxes, capital gains taxes and estate duties on your death, continuity purposes, flexibility of the movement of money, cost effective and privacy of your assets to mention a few.

How will a trust help you to possibly save some property income taxes, even though it gets taxed at a flat rate of 40% from the first cent? Well, the first possible saving lies exactly in the 40% tax rate, as you now can put all your property expenses through the trust and claim tax relief at 40% e.g. you have an expense of R10,000 you can claim relief of R4000 (i.e. 40% from the first cent). Secondly, a trust when correctly planned, according to the tax act, it might be possible to move profits freely to lower income tax rates e.g. your spouse or children. This means that a greater part of the profit will be attributed to the lower (or nil rate) taxpayer thus meaning that any property tax liability could be significantly reduced.

This is a very powerful strategy, as any tax liability can be legitimately reduced or wiped out.

Please note: again you would require professional help if you want to pursue this option as the legal and tax side of trusts have many minefields and if your advisor are just a mass producers of trusts, your interest is not at heart and the changes are good that you'll land in one of these minefields. When it comes to trust planning, bigger is not always better and most of the bigger trust producing firms could be seen as just being trust mills without all the "know-how" with regards to the tax issues surrounding trusts.