A closer look at business trusts

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People are still advised to utilise trust structures when they structure their business affairs to avoid paying taxes. Although historically people often got away with paying minimal taxes, if that is your primary reason for establishing a trust nowadays, you are on the wrong path.

Can you bequeath your assets to an existing inter vivos trust?

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It may make sense in many instances to utilise your existing trust/s as part of your legacy plan. Your assets can be bequeathed to an existing trust, if that trust instrument allows for that. The trustees of that trust have to be specifically empowered in terms of the trust instrument to accept such a bequest. Review the trustee power clause to ensure that the trustees can accept further donations/bequests.

Be careful what beneficiaries can do with their rights

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A trust is either set up during the live of a person (inter vivos trust) or upon the death of such person in terms of his/her will (testamentary trust). Beneficiaries are those persons who are initially named by the founder in the trust instrument and are subsequently selected by the trustees from time to time in terms of the trust instrument stipulations, set by the founder.

Oral trusts - valid and useful?

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The Trust Property Control Act defines a trust is a structure into which property is transferred, which is then administered by trustees, on behalf of one or more beneficiaries, in accordance with the trust instrument, which could be a trust deed, a will or a court order. It means that this Act does only apply to written trusts and not to oral/verbal trusts.

Who pays the tax on reducing a loan to a trust and are there exclusions?

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What the South African Revenue Service (SARS) aims to achieve with the debt reduction rules is to tax the taxpayer (the borrower) on any tax deduction/tax advantage that the borrower has achieved or will achieve in future resulting from any “debt benefit”; therefore undoing any such historic or future tax deduction/tax advantage in the hands of the borrower. It does not deal with taxing the lender.

Can trustees apply and apportion expenses in such a way as to experience the greatest tax advantage?

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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).

Writing down loans to trusts is a minefield for the unwary

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Often assets are moved into trusts on loan account due to the fact that trusts do not have access to cash to buy the assets. Traditionally this was also a very effective way to move growth assets away from your personal estate into a trust in order to prevent the attraction of estate duty on such growth. However, since March 2017 the South African Revenue Service (SARS) introduced an anti avoidance provision to prevent such estate duty savings (Section 7C of the Income Tax Act).

Preserve your wealth for future generations

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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.