Can you use a trust to protect your assets while you are alive?

Trusts are relevant today if they are used correctly. A very important consideration is the stage in your life that you create a trust. If you form a trust as part of your estate plan and create wealth in a trust, in stead of in your personal name, you can benefit from the trust during your lifetime, not only after your death. 

Separate your personal assets from your business or property holding

The number one wealth preservation rule is to protect your assets.

If you have your own business, sizeable investments and/or other assets, then you might want to pay attention. One of the most important reasons to consider a trust is because it will help you to separate your assets from your property investment debt, your business interests, and/or your other financial risks. Assets owned by a trust do not form part of the insolvent’s estate, and therefore cannot be attached by his/her creditors. Section 12 of the Trust Property Control Act states that “Trust property shall not form part of the personal estate of the trustee except in so far as he/she as trust beneficiary is entitled to trust property”. This would be the case with a discretionary trust where beneficiaries became entitled to trust property when the trustees vest trust property in such beneficiaries. This should, however, not be seen as a form of blanket protection because there are a number of sections in the Insolvency Act that will allow the trustee of the insolvent estate to claw these assets back into the insolvent estate. Where the assets were transferred to the trust while the estate planner was solvent, it would be difficult for creditors to set aside the trust’s actions.  

Why is this separation so important? 

Some of the risks that business owners experience include potential claims for financial damages from creditors, employees, tenants, customers, and even competitors. Even though you might not be directly responsible for the incident that led to the claim against your business or property investment, your personal assets could be used to settle the claim against your property investment or business. This principle not only applies to business owners, but also to anyone with a relatively large asset base, who is also exposed to any financial risk, such as claims, debt, sureties, and so on. With today’s high rates of divorce and relationship breakups, a trust may also protect your assets from claims arising from matrimonial or relationship disputes. 

The way you transfer assets is important

The manner in which assets are transferred is relevant when it comes to the extent of their protection. For example, if you transfer an asset on loan account, the amount of such loan account will remain an asset in your estate until the trust fully repays the loan. The implication is that the loan will not be protected from creditors. The loan is considered to be an asset in your own hands, and it can be attached. Creditors can—if your loan is repayable on demand as per your loan agreement—demand repayment from the trust, and they can then liquidate assets in the trust to ensure that this loan is repaid to them if the trust has no available cash. Be mindful of possible attacks from the South African Revenue Service (SARS) in future, where interest-free loans are repayable on demand. The Davis Tax Committee proposed in its Second Interim Report that it recommends the inclusion of all trust assets in the estate of the founder, due to the funder’s “control” over the trust. This is however a far-fetched proposal. 

Over a period of time, as the loan decreases—provided there are repayments—and the asset value increases in the trust, the benefit of asset protection will be established. 

Take note that there are new tax consequences if you create an interest-free/soft loan account, instead of charging the official interest rate (repo rate plus 1%), currently 7.75%, on such loans. Donations tax will now be payable on interest foregone below the official interest rate. The effect is that SARS assumes that trust assets grow by at least the official interest rate annually. The estate planner will now have to carefully consider which assets he/she wants to transfer to a trust, as SARS introduced this as a measure to access estate duty it would have lost on growth that took place in the trust, in stead of in the estate planner’s hands. So during the life of the estate planner, he/she will have to annually make a cash payment of this tax, which will have an impact on his/her cashflow. Normally estate duty is paid on such growth only upon the death of the estate planner. 

Correct financial planning will involve assets being bought into the trust from the outset, rather than being purchased in the estate planner’s name and then transferred to the trust. This is why it is so important to set up a trust before large assets are accumulated.