Are Trusts Doomed for Estate Planning?
Are Trusts Doomed for Estate Planning?
A Trust is a separate legal entity which exists apart from the individuals who control it and benefit from it. It has its own bank account and submits its own tax returns and may draw up its own annual financial statements.
SARS has introduced heavy tax rates and rules to limited the use of trusts and therefore the benefits to use a trust must be reconsidered.
Advantages of a trust
There are a number of advantages to placing assets in a trust for estate planning purposes. These advantages include:
1. Saving on estate duty. Currently estate duty of 20% is payable on every rand above R3.5 million of assets an individual owns. The growth on assets, such as shares, transferred to a trust is not subject to estate duty, because the growth belongs to the trust. If you have made use of a loan to the trust, the value of the assets as at the date of transfer remains an asset of your estate because of the loan account in your estate.
2. A trust does not die. It allows the assets to continue operating when you die as most trusts have a clause nominating a beneficiary or other person to become a trustee on your death. As an individual your estate would be frozen on death. This means that a trust is not liable for estate duty, other taxes or costs, such as transfer duty, executor’s fees, or conveyance fees, that would be payable in the hands of your estate or heirs. Also, the trust does not pay CGT as long as an asset is not sold.
A trust does not die and can therefore continue in perpetuity. This allows for the continuation of the assets, property portfolio which allows for future generations to benefit from your labour, no costs, no transfer, no cancellation of bonds, there is no Estate Duty, CGT or executors.
As a Trust holds the assets and cash, they are immediately accessible versus the situation where individual dies and takes 2-5 years to wind up, causing hardship to spouse and dependants
3. Fixing value. The value of any assets transferred to a trust is effectively frozen for estate duty purposes.
4. Trusts continue to pay benefits to dependants (beneficiaries) after you die. On the other hand, assets in your estate may not be freely available to your dependants, because your estate is frozen during the winding up process. This may result in your dependants not receiving an income until after your estate is finalised.
5. Protection of assets. If a trust is set up correctly and all transactions is done proper with guidance of an expert your assets should be protected against any attack by Creditors or if you are sequestrated. A beneficiary cannot sell a right in a trust (unlike shares in a company). If a beneficiary becomes insolvent, the assets in the trust continue to be protected (unlike shares in a company). Likewise, if you, as the donor, or the trustees become insolvent, the trust’s assets remain protected.
6. Income splitting: If a trust is set up proper and all transactions to transfer assets into the name of the trust is done proper you can split the income to the beneficiaries and save substantially on income tax
7. Capital Gains tax. Also, the trust does not pay CGT as long as an asset is not sold.