Which assets should be held in a trust?

Historically, estate owners were advised to move all paid up personal assets into their family trusts to save on Estate Duty, often on interest-free loan account. However, if upon your death the loan has not been repaid, the outstanding loan would constitute an asset in your estate. In many instances, due to transferring depreciating assets into the trust, the loan value included in the estate end up being much higher than the value of the assets so transferred. To make matters worse, should the trust be unable to repay the loan, the executor could have the trust liquidated in order to repay this loan before winding up the estate, which might unnecessarily expose other assets that you attempted to protect in the trust.

In an attempt to prevent estate freezing, through moving growth assets into a trust, Sars introduced an anti-avoidance provision, effective 1 March 2017 (Section 7C of the Income Tax Act), whereby Sars will attack any arrangement that attempts to exclude growth in your personal estate through the introduction of a deemed donation on interest-free loans made to trusts. This will have the effect of the estate planner having to pay “death taxes” during his/her life on this potential growth.

The landscape for trusts has changed and estate owners have to understand that one cannot go about with trusts the same way as prior to March 2017. Estate owners will now have to be careful about which assets they want to protect in a trust and, apart from the sentimental assets, rather focus on moving high growth assets and assets they want to protect from creditors, into a trust.

Remember that it is not always simply about the tax savings or the additional taxes payable on assets transferred to a trust; it is also about a strategy to protect your assets, and to create continuity and liquidity upon your death. There are also other considerations, such as a contingency plan in the event that you develop Alzheimer’s Disease.

If it is at all possible, estate owners should do proactive estate planning and rather purchase assets directly in a trust, before its value increases in the hands of the estate planner first, before it is moved into a trust.

Should a trust own immovable property?

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. 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. 

Upon your death, your properties, outside of a trust, would be caught up in your frozen estate. Your spouse, your dependents, and other persons will not have access to these assets - the properties themselves or any rental income that they might be generating - until such time as your estate is wound up. This can sometimes take many years. 

If your primary residence is registered in your name, it will form part of your estate, and the beneficiaries and the executor will decide what will happens to it. This will be based upon what you have stipulated in your will. In the event of there being insufficient liquidity in your estate, the executor may be forced to sell the house to generate cash to pay the Estate Duty. Holding the property in a trust would eliminate this problem and ensure continuity of income and tenure for the beneficiaries of the trust. 

If you hold your primary residence in your personal name, your death will trigger Capital Gains Tax (a deemed disposal), subject to the inter-spousal roll-over provisions, regardless whether the property is sold or retained by the family upon your death. Was it held in a trust, no death will trigger Capital Gains Tax and it can be carried forward for generations, without triggering Capital Gains Tax; it will only be payable upon the actual sale of such property by the trust. However, you have to take into account that you will lose the R 2 million primary residence exclusion for Capital Gains Tax purposes, if you sell it out of the trust, rather than out of your personal name. 

Luckily, the punitive provisions on interest-free loans in terms of Section 7C of the Income Tax Act, excludes loans related to primary residences. 

The decision to move your primary residence into a trust depends on your individual circumstances. The general rule of thumb is to only consider moving any property into a trust if you plan to hold it for a long time, unless you want to protect it from your creditors.

Should a trust own shares in a company, or member’s interest in a close corporation?

The main reason to house shares in a company or member’s interest in a close corporation in a trust should be to protect such assets from creditors. Often business owners are required to sign sureties in their personal names and may then expose the shares or member’s interest to creditors, if they are held in the estate planner’s personal name. 

It may also capture the growth on the shares and member’s interest in the trust, and thereby avoid Estate Duty on such growth upon the estate planner’s death, if it was held by the trust upon death.

Since 2005 an inter-vivos trust can own member’s interest in a close corporation, if certain conditions are met. 

Should your life insurance pay out to a trust?

The main aim of taking out life insurance is to provide liquidity in an estate to pay Estate Duty, a mortgage bond liability, vehicle finance agreements, taxes and winding up costs, such as Executor’s Fees. Otherwise the executor will have to sell assets to pay these costs. However, if most of your assets are held in a trust, this may not be such a problem.

Many South Africans are under the impression that payouts from life policies do not form part of their estates for tax purposes. This, however, is a misconception, because the calculation of Estate Duty includes both property and deemed property (such as most life policy payouts). Structuring life policies in a trust, in stead, has the benefit of reducing such Estate Duty payable, as well as eliminating Executor’s Fees thereon.

If the possibility of a trust-owned policy has not been considered, one needs to ask whether an adequate financial needs analysis has been carried out by your financial advisor.

Even if SARS does manage to enforce stricter tax measures on trusts in the future, they will certainly never undo the benefits of structuring your life insurance in a trust, such as asset protection and the provision of liquidity.

What about other valuable assets such as paintings, furniture and jewellery?

With the tax benefits associated with asset transfers to trusts being limited, the focus has shifted to transferring assets that will outgrow any tax cost, as well as personal assets, such as investment paintings and antique furniture, as well as assets with sentimental value.