Funders of trust structures be ware of the looming tax changes

~ Written by ~

It is well known that trusts and estates have been under the magnifying glass of the South African Revenue Service (SARS) for a while now. This led to the introduction of an anti-avoidance measure (Section 7C of the Income Tax Act) effective from 1 March 2017, whereby SARS accesses growth in a trust. SARS wanted a way to access growth in assets, which people historically deliberately moved into a trust and thereby “froze” the value of the estate for estate duty purposes. As an example, a farmer transferred his farm into a trust many years ago at a value of R1m and created an interest-free loan for that amount to the trust. Therefore, upon his death, thirty years later, the farm in the trust may be worth R50m, but the loan of only R1m is reflected in his estate. SARS could therefore not access the growth in the farm upon his death, as the trust is a separate entity.

Time to review your trust deed?

~ Written by ~

The beginning of a year is a good time to review a trust deed to ensure that it is still relevant and to understand how changes in circumstances can impact a trust arrangement.

Be careful of your automatic removal as trustee

~ Written by ~

Often estate planners sign trust deeds without reading it first. This creates a huge risk, as many trust deeds are ‘copied and pasted’ and do not reflect the wishes and personal circumstances of estate planners and their families. One particular aspect the estate planner has to pay attention to is the appointment and removal of trustees in terms of the trust deed. Unintended consequences may arise if the trust deed automatically removes a trustee on the happening of an event specified in the trust deed. This may have dire consequences, as the estate planner, who may have been appointed as a trustee, may be automatically removed and then loose the ability to participate in trust decisions.

Is there such a thing as a dormant trust?

~ Written by ~

Often people refer to their trusts as ‘dormant’ trusts that do not need any work and that they do not want to pay a lot of money for to administer. Is there such a thing as a dormant trust? I do not think so – a trust is either alive or it is dead. The word ‘dormant’ is used to describe something that is temporarily inactive or when its normal physical functions are suspended or slowed down for a period of time, or it is even in a deep sleep. Another definition refers to something that is dormant as not being active, growing, or being used at the present time, but which is capable of becoming active later.

The role of the founder of a trust

~ Written by ~

A trust can be described as a legal relationship which has been created by a person (known as the founder, donor, or settlor) through placing assets under the control of another person (known as the trustee) during the founder’s lifetime (an inter vivos trust) or on the founder’s death (will trust, testamentary trust or trust mortis causa) for the benefit of third persons (the beneficiaries). Therefore a trust is either a contract (Crookes v Watson case of 1956) that is brought about by a person (the founder) when he/she is alive or it is a testamentary disposition that is brought about on the death of a person. A trust can also be created in terms of a court order (court order trust), such as a divorce order.

Trustee, be mindful of your mental capacity

~ Written by ~

When transferring assets to a trust, tax savings is not the only consideration. It is also about a strategy to protect your assets, to create continuity and liquidity upon your death, as well as other considerations—such as a contingency plan should you develop a mental illness such as Alzheimer’s Disease or senile dementia. Registering a trust, in which you build wealth, acts as “insurance” should something go wrong with your mental health. If you have created a trust during your lifetime and become afflicted by one of these dreadful conditions, your financial affairs would continue as before, with persons that you entrusted as trustees of the trust. Therefore the appointment of trustees should be carefully considered in anticipation of these circumstances.

The trust as taxpayer

~ Written by ~

A trust is different to a company or a close corporation in that it is the trail of each transaction with the trust that will determine whether it is the trust that is liable for the payment of any tax on income or capital gains earned within the trust, or a person connected to the trust, such as a funder, donor, or beneficiary.

Because the South African Revenue Service (Sars) has begun to view trusts as a means of structured tax avoidance, a number of measures have been introduced over the years resulting in the income of trusts being taxed at 45% - the highest rate applicable to individuals - and capital gains being taxed at 36% - the highest effective rate applicable to any taxpayer (although the effective tax rate for a capital gain distributed to a shareholder in a company is now at a higher rate of 37.92% after the increase of the dividend tax rate in February 2017).

Trustees can manipulate a trust

~ Written by ~

Trustees are the guardians of a trust’s assets. They are also the decision makers of a trust. The founder should ensure that the trust deed, the constitutive charter of the trust, deals in sufficient detail with the appointment and removal of trustees. If it does not, trustees may manipulate the trust and may cause the objective of the trust not to be met. Many court cases deal with the abuse by trustees of trust assets and the appointment and removal of trustees to influence voting.