How to move assets into a trust

The general perception is that trusts are just for the wealthy. Therefore people believe that they have to build up wealth before it warrants setting up a trust. It can be a costly exercise to move assets, acquired by you, into a trust at a later stage. The perfect time to establish a trust, as part of your estate plan, is when you start building wealth, in order to avoid unnecessary costs. Depending on when you set up a trust, the following mechanisms are available to move assets into a trust. 

1. Cash donation or donation of your assets

High net worth individuals with Estate Duty concerns may use their annual R 100 000 Donations Tax exemption (or R 200 000 per couple) to move assets into an inter-vivos trust, of which family members are the beneficiaries. This may consist of a donation of money, or goods, to the trust. However, be mindful of the adverse tax consequences on income generated from donations to a discretionary trust. The anti avoidance provisions tax income/capital gains not distributed by the trust, attributable to such donation, in the hands of the donor, and also tax distributions to beneficiaries in the hands of the donor, for example when the donor can veto distributions. 

The utilisation of donations by the trust for investment in an endowment is a tax effective manner to transfer assets into a trust. The potential tax saving is significant and is dependent on who the trust beneficiaries are. Where the trust’s beneficiaries are natural persons, the growth in the endowment policy will be taxed at 30% on interest and net rental income and 12% in respect of capital gains. In contrast, if the trust was taxed in its own hands, the rates would have been 45% on income and an effective 36% in respect of capital gains. This mechanism bypasses all the punitive tax rates for trusts, as well as the anti-avoidance provisions. 

2. Sale of your assets to the trust

You have the option of selling your assets to a trust. If the transaction is not recorded as a sale it will be deemed a donation. This can be problematic because any donation over R 100 000 per year is subject to Donations Tax at 20%. It is therefore important to draw up a sale agreement. Failure to do this will result in the South African Revenue Services (Sars) viewing the transaction as a donation and imposing Donations Tax on the “donor”. 

When assets are sold to the trust, the trust does not usually pay for the assets due to a lack of liquidity in the trust; instead, the trust creates a loan account and owes the seller the money. This loan account is seen as an asset in the transferor’s personal estate for Estate Duty purposes. A loan agreement should be concluded between the buyer and the seller and should stipulate the loan terms, and in particular the interest rate charged. Be mindful of the new anti avoidance provision, which attacks interest-free or soft loans.

While a trust offers asset protection against creditors, it is important to note that as long as there are loans or claims against the trust by any person (for example the seller), the trust could be exposed to the creditors of that person. It is therefore important to reduce the value of the loan account to zero as soon as is practically possible. The smaller the loan remaining in your estate upon your death, the less you will pay in Executor’s Fees and Estate Duty.

Selling assets to a trust at less than market value in an attempt to minimise the loan amount will have the following unintended consequences:

• You will be liable for Donations Tax on the difference between the market value and the sale price of the assets.
• Any income apportioned to this difference will be taxed in your hands until the day you die, in terms of the anti-avoidance provisions.

There are three main ways of reducing a loan account:

• Donations

Both husband and wife may donate R 100 000 each year to the trust in order to reduce a loan. It is no longer required to physically pay the cash to the trust to avoid Capital Gains Tax. One can merely do a book entry. 

• Loan repayment from excess cash in the trust

If there is liquidity in the trust, you can withdraw funds from the trust and in the process reduce your loan account. 

• Bequeathing a loan upon your death

In terms of your will, the loan account against a trust can be bequeathed to another party (however be mindful of the anti-avoidance provisions that may follow such party), or you can also bequeath an amount outstanding on the loan account to the trust, which will extinguish the loan. 

3. Bequeathing your assets upon your death

Your assets can be bequeathed in terms of a testamentary trust or to an inter-vivos trust. In both cases, Estate Duty and Executor’s Fees will be paid first, before such assets can be moved into a trust. If there is not enough liquidity in the estate, the Executor may have to sell assets to pay the Estate Duty and Executor’s Fees before anything can be transferred into the trust. For these reasons, it is not recommended to wait until your death to move assets into a trust.

4. Trust purchases its own assets

Fewer complications will be created if the trust purchases its own assets directly from third parties. Sars would then be unable to apply any of the anti-avoidance provisions dicussed above. It is, however, not advisable for the trust to purchase assets on credit from a third party, if it may expose other assets in the trust to such creditors.