The 2017/8 budget speech and the concomitant amendments to the Income Tax Act contained a series of unpleasant changes for the law abiding South African taxpayer. It ranged from fiscal drag 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 prompted the question – are trusts still viable tools in the estate planning arena? And the questions are probably valid.
The answer to that question is still an unequivocal yes. That YES however has some important proviso’s:
1 The trust must be set up to fulfil a bona fide estate planning need;
2 The trust assets must consist of the correct assets identified during the estate planning process, and
3 The trust must be properly managed having regard to the:
a. Purpose of the trust;
b. Prevailing legislation (particularly income tax), and
c. The level of corporate governance, accounting and administration required by statute, common law and case law;
4 Lastly but probably most importantly, the trust must NOT have been set up with the 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 and charitable purpose, it is still a useful estate planning tool. It offers the estate planner a means of benefitting 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 planner’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!
Finally, it is and remains important to get proper and sound advice from a qualified fiduciary practitioner on these matters. Do it and reap the benefits. Ignore this and do so at your peril.