In my capacity as Fiduciary Attorney and Estate Planner I regularly encounter the question – are trusts still viable tools in the estate planning arena? Are Trusts on the way out? And the questions are probably valid, albeit that there seems to be a sharpened “anti trust” movement afoot.
Trusts, particularly the inter vivos species or so-called family trust, have been around for centuries and have roots as far back as the middle ages and property transactions in Biblical Times. Through the ages common law developments ensured that trusts provide some very innovative and useful estate planning tools and opportunities.
Unfortunately lay persons and armchair specialists and often discredit valid and useful tools such as trusts with unfounded arguments. Often these arguments are born from pure ignorance.
One event that launched a series of such criticisms was the 2017/8 budget speech and the concomitant amendments to the Income Tax Act. The budget contained a series of unpleasant changes for the law abiding South African taxpayer. It ranged from fiscal drag (which is repeated annually) to the introduction of the new Section 7 C and the draconian 45% tax rate now imposed on the super earners – and all trusts (excluding special trusts). This again prompted the valid question – are trusts still viable tools in the estate planning arena?
The answer to that question is still an unequivocal yes. That YES however has some important proviso’s:
- The trust must be set up to fulfill a bona fide estate planning need;
- The trust assets must consist of the correct assets identified during the estate planning process, and
- The trust must be properly managed having regard to the:
- Purpose of the trust;
- Prevailing legislation (particularly income tax), and
- The level of corporate governance, accounting and administration required by statute, common law and case law;
- Lastly but probably most importantly, the trust must NOT have been set up with the single or overriding purpose to avoid or evade any form of tax.
If these requirements are met, trusts will continue to remain useful estate planning tools. The effectiveness of trusts as a means of reducing your tax liability has largely been curtailed, if not completely negated. However, should the planner wish to use the trust for its intended discretionary (or charitable) purpose, it is still a useful estate planning tool. It offers the estate planner a means of benefiting designated beneficiaries, while the trustees who administer the assets on their behalf offer a measure of protection, both from the potential squandering tendencies of beneficiaries, and from potential creditors. In allocating trust income and capital, trustees will continue having much flexibility to adapt to the changing circumstances and needs of beneficiaries, thereby offering the planner considerable peace of mind. The estate planner can further realise the intention of generating wealth acquisition and growth outside of the client’s personal estate resulting in long term protection of those assets for his loved ones and dependents.
But what about the new Section 7 C you may ask? This section imposes annual donations tax on the value of interest free loans to trusts.
Firstly, if the loan is below R 1 250 000 (R2 500 000 for 2 spouses) the annual R100 000 donations tax exemption will nullify the effect of Section 7 C. Only at levels above this figure will donations tax become payable.
Secondly, any trust is at liberty to embark on proper financial planning and implement financing structures that will eliminate the effect of Section 7 C – and these structures may be tax advantageous to boot! In specific cases it may benefit the trust planner (i.e. the founder or the settlor) and beneficiaries to simply pay the 20% donations tax on existing loan accounts (or a portion thereof) and then be done with any further impact from Section 7 C.
Finally, it is and remains important to get proper and sound advice from a qualified fiduciary practitioner or financial advisor on these matters. Do it and reap the benefits. Ignore this and do so at your peril.
In the next article, trusts in a nutshell, we will consider the different types of trusts commonly used in South African planning scenarios.