SET-UP OF TRUST

An “Inter Vivos” Trust is established during your lifetime. The process to register a trust is fairly easy, but it is of utmost importance to consult an experienced trust attorney to draft the trust deed. (see more)  This is the contract that dictates the relationship between you, the founder, and the trustees.

ESTATE PLANNING

• One of the primary advantages of a living trust is that it offers you tax efficient management and control of your assets after you die. (see more) The growth in your estate is “pegged” and the value will increase in the trust. A trust creates a separate legal entity, that owns the assets outside of your personal estate, and therefore the Trust Assets do not form part of your estate for the calculation of estate duty.

• Taxes and costs amounting up to 35% on death can be saved, including:

• Estate Duty (20% of Estate) as the Trust will continue to persist after your passing.
• Capital Gains Tax (10% CGT) on your growth assets.
• Executor Fees (at 3.99% of your Gross Estate). This is a particularly unnecessary and avoidable tax. Executor fees are calculated on the gross value of your estate and deducted before any other expense, therefore the executor can receive up to 15% of your net estate.
• Transfer costs on immovable property (as property ownership does not transfer to anyone after you pass away).
  
  
• Bank accounts and cash reserves will not be frozen during the winding up of the estate, which can take up to 2 (two) years. A trust will ensure rapid access to capital and income after your death.
  
  
• Protection of Minors. In SA Law a minor cannot be the registered owner of property, therefore the asset is liquidated and the proceeds invested in the Guardian Fund at 3% interest rate. Assets are also protected against spendthrift children, who will not be able to reduce the assets to zero.
  
  
• Multi-ownership of assets. Some assets can not be divided, e.g. businesses, farms or other property. By placing these assets in trust, the heirs can be the beneficiaries of the income generated by these assets.

• Confidentiality. Your Will becomes a public document on your death. A Trust does not form part of your estate, and thus the assets of the trust remain confidential.

Protection of assets against creditors. Your personal liability is limited to the assets in your name.  (see more) Creditors cannot access the assets in your trust, unless it was set up with the intention to defraud creditors.  Each risk poses a potential threat which could result in dire consequences.

The major risk categories are:

• Financial risk: Mortgage Bonds or Hire Purchase / Lease agreements – the majority of South Africans need to make use of these sources of finances to purchase a house or vehicle. In event of default, all assets in your own name are at risk of being sold in execution. In a market where interest rates are fluctuating, the banks are executing against bonded assets on a daily basis as consumers default on payments.
  
  
• Business risk: As a business owner (whether as sole proprietor or member of a CC or shareholder in a company) you are likely to have signed personal surety for loans or credit agreements to the company, or are the co-principal debtor with the company in respect of your suppliers’ credit arrangements.
  
  
• Personal risk: Car accident/s, defamation in a public place, involved in a scuffle or conflict with neighbours, etc, in other words a claim between natural persons that may arise from social interaction.

• Divorce or Family risk: Statistically, your spouse can be your biggest creditor, as nearly 2 out of 3 marriages end in divorce. A big portion of your estate can be awarded to the ex-spouse, as well as possible claims for maintenance.

TAX PLANNING

• The advantages of proper tax planning in a well-structured trust are clearly defined in the tax legislation. (see more)
• Even minor beneficiaries can enjoy tax-friendly distributions.
• Conduit Principle: Unlike companies or close corporations, the Trustees can decide to pay the Income Tax (40%) or CGT (20%) in the hands of the Trust or distribute the tax liability to the beneficiaries at their marginal rate of tax (Income Tax 18% to 40% or CGT at 10%), thereby paying much less tax.
• Income Splitting: Trustees can use the conduit principle and pay beneficiaries who have tax exemptions (individuals have nearly R60 000 income per year, free of tax).

LEAVING A LEGACY

• A Trust is an entity that will “outwit, outplay & outlast’” you, and will not terminate (see more) (unless decided by the Trustees), therefore it can own properties and assets for generations, and pass this portfolio of assets to the next generation tax free.
• A Trust is the only vehicle which allows you to accumulate wealth and transfer same from generation to generation, without incurring costs and taxes. By starting today, you can ensure your children receive all your wealth and assets to which they (and their family) can add, in order to pass to their children. The problem of employment, economic cycles and market conditions can be avoided for your children, if they know they have an income producing Trust providing passive income streams (primarily through property).