Proposed tax changes by the Davis Tax Commission are threatening the taxation of trusts and people are starting to wonder if they should move assets out of trusts and if they should still consider a trust in their financial planning at all. Some fundamentals around these entities should be carefully considered before making rash decisions or disregarding the possibility of using a trust at all.
The Davis Tax Commission recently released an interim report to highlight some of their proposals with regard to the wide term of “wealth tax” that they were mandated, amongst others, to investigate and consider. Within this consideration the taxation of trusts was looked at in more detail and some relatively drastic proposals have been made in this regard.
The question has therefore been raised whether trusts still have any use at all and therefore one should not necessarily discuss the proposed changes but look at some fundamentals around trust that remain. Some of these may be affected by legislation and case law, but other are relatively fixed benefits.
What are the fixed benefits?
These benefits are core and fundamental to the reasons and purpose of establishing a trust and have been around in law for many decades. One of these is that trusts ensure the smooth hand over of assets, known as inter-generational wealth transfer. When an individual passes away, assets owned by the deceased, must be dealt with by the executor of their estate. Only once the executor has dealt with the deceased estate can the assets be passed on to the heirs. This is a time consuming exercise and in some circumstances can place the surviving spouse in a financial predicament. Assets that are owned by a trust do not form part of the deceased’s estate, which means that the surviving spouse or children can still access assets (including funds) whilst the estate is being wound up. The fact that the assets are owned by the trust significantly simplifies the winding up of the estate.
Furthermore trust also allow for the protection and management of assets for persons that are unable to or unwilling to manage these themselves. Children under the age of eighteen may not inherit directly from anyone, which means that either the assets must be sold and the funds transferred to the guardians fund (a government institution) or alternatively they must be held in trust until the child reaches the age majority (or any age above the age of majority determined and specified by the deceased in their will). People with mental conditions are unable to look after themselves, specifically in respect of their financial affairs, their initial caregivers may also not be around forever and therefore special trusts can be set up to ensure the needs of people suffering from mental conditions are taken care of.
By transferring assets to a trust during your lifetime will ensure a solution to the abovementioned situations where individuals, irrespective of their age, are unable to administer and manage their own financial affairs. Carefully selected trustees can then continue to manage these assets for the nominated and selected beneficiaries.
What are the variable benefits?
Tax benefits are variable and as is evident from the Davis Commission proposals these will change from time to time. Although most people want to know the tax benefits of trusts what should be kept in mind is that nothing should ever really be done for tax benefits that may exist at any time and point because tax laws change yearly in South Africa. However, even with the proposed changes to the taxation of trusts there are a couple which remain, but once again these are mainly aimed at long term estate planning and result in individuals saving on some taxes in the event of death.
Death triggers a capital gains (CGT) event and therefore you will have to pay CGT in your estate on certain assets. If however these assets are held in trust this will not be the case. This ensures a tax saving in your estate and also ensures that you don’t have a liquidity problem as a result of the taxes payable. The same goes for estate duty in the event that this would be payable, as assets held in trust do not form part of your estate. You will also save on the executor’s fee, as the executor of your personal estate will not handle any assets held in trust.
By holding assets in trust you are also afforded creditor protection as assets held in trust do not form part of an insolvent’s estate and hence cannot be attached. Section 12 of the Trust Property Control Act states; “Separate position of trust property – Trust property shall not form part of the personal estate of the trustee except in so far as he as trust beneficiary is entitled to the trust property”. This should not be seen as blanket protection as there are a number of situations where due to bad trust administration the courts have made decisions to include trust property in the personal estate of individuals.
Trusts are therefore still a good planning tool to consider, regardless of proposed changes to their taxation and there are still fixed and variable benefits afforded to them. So don’t discard them anytime soon.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)