Preserve your wealth for future generations

Most people who have accumulated wealth in their lifetimes, or who have inherited wealth, prefer to see their wealth spread beyond the next generation. A trust is the most effective vehicle for the preservation of wealth. A well run trust allows succeeding generations to participate in, and benefit from, the wealth created in one or more prior generations. One only has to consider the large numbers of students that still benefit from bursaries created by people like Cecil John Rhodes.

If you bequeath your estate to individuals, it may become a case of easy come, easy go. For example, people who inherit, and/or their spouses, may not attach sentimental value towards the inheritance, and a spouse may put pressure on his/her spouse, who inherited, to liquidate the assets in order to go on an expensive holiday.

An important consideration is the fact that every death triggers Estate Duty as well as Capital Gains Tax, whilst assets held in trust are not affected by any death. Capital Gains Tax is only triggered when the trustees physically sell an asset, or when it is distributed to the beneficiaries. The combined tax rate of Capital Gains Tax (up to 18%) and Estate Duty (20% on amounts up to R 30 million and 25% on amounts in excess of R 30 million) for an individual is still higher than the Capital Gains Tax rate (36%) within trusts.

There are also practical benefits to preserving family wealth across successive generations. A large farm, or shareholding in a company, being transferred from one generation to another, will not attract Estate Duty when it is held in a trust. Capital Gains Tax is also delayed until the farm, or shareholding in the company, is eventually sold by the family, a number of generations later. If the farm, or shareholding, was held by the family directly, the Estate Duty and Capital Gains Tax due on the death of each successive family member create a huge financial drain on the business, which could eventually force the family to sell the farm, or shareholding, if they run into liquidity problems.

People often decide that they do not want their wealth to become a disincentive for the success of the next generation. For this reason trusts are created so that the next generation can improve their lifestyles and explore their talents without being entirely dependent on inherited wealth for their daily living. So much talent has been thrown to the wayside by generations who choose to live from the trust’s assets, rather than explore their abilities and build careers of their own. A well-managed trust aims to prevent this from happening. 

Something that may influence your decision in terms of which personal assets to transfer into a trust, would be the consideration of which sentimental assets to preserve in the family for the next generations, as well as those personal assets that will outgrow any tax cost (so growth greater than the official interest rate, after the introduction of donations tax on interest-free loans). You might want to reconsider those assets that you historically transferred to a trust on an interest-free loan account, because they may have unnecessarily inflated your interest-free loan account. Assets with no sentimental value or those assets that have not and will not massively grow in value in years to come, should be sold back to you by the board of trustees.

Tax is not the only consideration in a decision to move assets into a trust in order to preserve your wealth. Other important considerations include the protection of the assets you want to move into a trust and the creation of continuity and liquidity upon your death.