Trustees have made distributions to beneficiaries to save tax, now what?

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Many boards of trustees have made distributions (often on paper only) to beneficiaries for the trusts’ February 2022 financial year-end in order to pay less tax on trust income and capital gains. A number of trustees forget that it does not stop there – beneficiaries had to be informed so they could include the distributions in their respective tax returns, trustees have to manage distributions separately for the beneficiaries and they have to keep proper records.

SARS is after the wealthy – how having a trust may help

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Today, the top 10% own about 85% of total wealth, the top 1% own 55%, and the top 0.1% own close to a third. The South African top 1% share has fluctuated between 50% and 55% since 1993, while it has remained below 45% in Russia and the US and below 30% in China, France, and the UK. The top 0.01% (about 3 560 individuals) own about 15% of household wealth, which is greater than the share of wealth owned by the bottom 90% of the population as a whole (32 million individuals). The average wealth of the poorest 50% is negative, as the total value of the debts they owe exceeds the market value of the assets they own. Our government has been imposing steadily higher taxes for decades. Currently, personal Income Tax (39,1%), Value Added Tax (26,5%) and Corporate Income Tax (16,4%) constitute the largest shares of tax revenues. Those in the top three brackets represent one third of the total personal Income Tax base.

Factors to consider before placing your primary residence in trust?

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In my previous article I discussed the potential benefits of holding one’s primary residence in trust. It is, however, important to consider important factors before placing your primary residence and other properties in a trust.

Should a trust hold your primary residence?

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Many people are in two minds, and may receive advice for and against, whether they should place or acquire their primary residence in a trust. For Estate Duty purposes, transferring immovable property into a trust ensures that any growth in the value of the property is contained within the trust, rather than in your personal estate, to the extent that such growth rate exceeds the official rate of interest (repo rate plus one percent currently 5%). Your assets are also protected from attacks by your personal creditors and/or the creditors of any companies that you might own and have signed sureties for.

That time of the year to make distributions to avoid paying tax in trusts?

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It is that time of the year (end of February each year) again that trustees have the opportunity to make distributions to beneficiaries to shift the tax liability away from the trust (which pays Income Tax at 45% from the first rand of income generated and Capital Gains Tax at 36% from the first rand of capital gains realised in the trust), to beneficiaries paying less or no tax at all (such as minor beneficiaries who do not earn any other income or capital gains). This is a tool that has been used by accountants and tax advisors for years in an (legal) attempt to pay less tax on trust income and capital gains. The questions is – is it that effective to just attempt to minimise the tax payable on this year’s trust Income Tax return?

Can trustees rely on the ‘majority rule’ to make decisions?

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Often trustees rely on the majority decision in trust instruments to make decisions. This is often done to deliberately exclude one or more trustees from decision making. The Courts have, however, in many cases, confirmed the ‘Joint Action Rule’, whereby trustees are required to act jointly in dealing with trust assets.

A fine line between delegation and abdication of trustee responsibilities

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Trustees are the guardians of the trust’s assets and have a duty to manage these assets in the best interests of all beneficiaries, as outlined in the trust instrument. Trustees may not act in a way that violates this duty, or is outside the parameters of the trust instrument. A number of trustees do not appreciate the seriousness of this role and often abdicate their responsibilities as trustees, either to avoid conflict with other trustees (typically soon-to-be-ex spouse) or because they are ‘silent’, ‘sleeping’, ‘absent’, or ‘puppet’ trustees, which our law in any way does not allow (Slip Knot Investments 777 (Pty) Ltd v du Toit case of 2011).

It’s necessary to review your will and trust deed regularly

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When someone has a will drafted or a trust registered, it is done given specific circumstances and at a point in time in one’s life. These circumstances do change. One could (and should) therefore review one’s will and trust deed on a regular basis, but at least once a year, to ensure that its terms are still relevant and representing one’s current circumstances. For example, one may have gotten divorced or married, one particular family member may become more reliant on financial support from the estate planner than others, children or other family members may have emigrated, which may introduce resultant tax complications for them as heirs and/or beneficiaries, etc. Laws may also have changed, which may warrant an amendment of the trust deed. The beginning of the year is a good time to review your will and trust deed.