Trusts, Asset Protection and Estate Planning

Trust information courtesy of iProtect - www.iprotect.co.za


Introduction

The concept of a Trust is over 900 years old and originates from English law. Over time the South African law on Trusts has been developed by legislature, the Courts and legal practitioners into the law have today.
A Trust can be described as a legal relationship which has been created by a person (known as the founder), by placing assets under control of another person (known as the trustee), during the founders lifetime (known as an Inter Vivos Trust) or on the founder’s death (known as a Testamentary Trust) for the benefit of third parties (the beneficiaries).
The Founder is the person who creates the trust and makes the initial funds available to the trust and is also known as the “Donor” or “Settlor”.
The Trustees are responsible for the administration of the trust property. They must act within the law and comply with the provisions of the Trust Deed.
The Beneficiaries are the persons who benefit from the trust, either now or in future. There cannot be a valid trust if there is not at least one beneficiary.
An Inter Vivos Trust is created by means of agreement (a contract) between the founder and the Trustees, during the lifetime of the founder. The agreement is called the trust instrument (the Trust Deed) and is signed in accordance with the Law of Contracts and registered with the Master of the High Court.
The Trust Deed is a legal document, requiring specialized legal expertise to draft.
A Testamentary Trust is created on the death of the testator in terms of specified provisions as set out in the testator’s Last Will and Testament.
Let’s start with what we may think we know about trusts:
These are some commonly perceived disadvantages:

• Firstly many people are under the impression that one needs to be wealthy to set up a trust, nothing could be further from the truth, in fact the best time to set-up your Trusts is just before you start to acquire your large assets or when you set up your business or practice – protection from day one.
• A further common myth that pervades is that the Government is “looking” at trusts. Trusts were previously not defined in the Income Tax Act as tax payers, this clearly gave rise to serious abuse of trusts for tax purposes. The Government has since 1991 made various amendments to the act to combat these practices. Since 2002 there have been no more amendments, so we can safely assume that there is a degree of stability in that area. Furthermore, the manner in which we will advise that you use your trusts, and the way they hold assets and trade, are securely within in the ambit of all existing laws and specifically the Income Tax Act.
• Transfer duty: duties payable on immovable property is higher in a trust as the transfer duty is levied at a flat rate of 8 %. However this is lower than the VAT that you pay when buying from a developer (14%). The comparison of the cost of the duty is further skewed when one acquires property at the lower end of the market, as there is a sliding scale that applies to natural persons (5-8%). The initial extra cost is well worth paying when one considers asset protection and death costs and taxes.
• The issue of Control: legally and technically, once a trust is formed, the assets that are held in trust are separated from the individual. The control of the assets is no longer in the hands of the individual. The reality however is that the individual, by being a trustee of the trust, will be privy to all decisions and retain negative “control”.
• Administration: a trust must be properly administered. The Trust Property Control Act requires that a simple set of annual financial statements be submitted. Please note that it is not mandatory that the financials be audited, as this will result in unnecessary further costs.
• The higher tax rate opinion: trusts are the most highly taxed entities or person in South Africa, they are taxed a flat rate of 40%. However there are mechanisms to minimise tax payable through the use of a trust. Paradoxically, by use of the “conduit principle”, tax efficiencies can be achieved through a Trust that cannot be achieved personally or through a Company. In short whether you have an income tax or capital gain, the taxation in the Trust can be minimized if not avoided.
Here are the facts – and compelling reasons why a Trust is the only legal vehicle affording holistic Asset Protection and Estate Planning for your assets, during and after your lifetime.
The concept and benefits of a trust:

• A trust is a separate entity from an individual, totally distinct as one person from another, however not unlike a Close Corporation (CC) or Private Company (Company) but quite unique, in that it is not a creature of statute, but it is the product of a contractual arrangement. The Income Tax Act, Deeds Registry Act, Transfer Duty Act, Value Added Tax Act and the Insolvency Act afford a Trust legal personality.
• A CC or a Company are entities created by completing and registering certain statutory forms with the Registrar of Companies which then registers the CC or Company and it comes into being. In contrast, a Trust is created by contract in a legal document, commonly referred to as a Trust Deed. The following points are important to remember: a Trust, while not a legal persona is separate from you; a trust is not owned by any natural or juristic person; and a trust never dies or terminates, unless it is terminated by agreement or sequestrated if it is unable to pay its debts. The latter qualities make a Trust the only entity which will afford total asset protection and estate duty savings along with a myriad of other benefits.
• There are various types of trusts, namely;
o Testamentary Trust,
o Vesting or Bewind Trust,
o Special Trust and
o Discretionary Trust
Only Discretionary Trusts are used for our purposes, as the other forms of trusts are of no benefit in affording the necessary asset protection and estate duty savings and Capital tax saving benefits that Discretionary Trusts are able to offer.

Trusts Benefits
Asset Protection
As individuals we face a number of possible situations which can result in us losing all of our hard earned assets, cash, investments and properties.

o Divorce
o Business creditor claims
o General creditor claims
o Other claims
o Retrenchment
o Sureties
The following are common scenarios which can result in substantial personal and corporate loss:
• A distressed business (new or established) will result in short-term obligations to creditors, for unpaid rental, supplier invoices, staff salaries, SARS taxes, bank loans, bank overdrafts and the like;
• Surety signed for any person or business will result in exposure to any claims for outstanding debt.
• Divorce is an emotional time, and very often irrational decisions are made which may result in assets being sold or liquidated unnecessarily.
• If married in community of property, you may face claims by creditors of your spouse.
• Generally your creditors may lay claim to your assets if you cannot pay your debts.
• Retrenchment for any variety of reasons, can leave you financially vulnerable, unable to meet your obligations, and place your assets at risk to creditors.
• Any individual may face a claim for damages, potentially resulting in the attachment of assets.
The above scenarios paint a bleak picture, but can be avoided and contained through the establishment of a Trust, or a combination of Trusts. The Trust is the only legal vehicle which can offer the individual total asset protection, achieved by virtue of the fact that a trust is not owned by the individual, and has a legal personality of it’s own quite distinct from the individual.
Once assets have been moved into a Trust, they no longer belong to an individual. There are certain laws that need to be borne in mind before the assets are secured. There is a window period prescribed in the Insolvency Act, which affords creditors protection from delinquent creditors. The Act prescribes that if a creditor has a claim against an individual who is solvent, and who has moved, sold, transferred or donated his assets, the creditor may within a 6 month period reverse such transactions and attach the assets. Assets must be timeously transferred into a trust so that this time period elapses, and the transferred assets are not liable to attachment under the relevant sections of the Act.
The situation is even worse if the individual is insolvent at the time of the transfer of assets, as the window period is extended to 24 months before the assets are secured from a creditor attachment



Benefits on Death
Proper Estate planning is essential to ensure a seamless flow of the benefits of your estate to your heirs, and to minimize or eliminate the Duties and Taxes triggered by death. A Trust is the only vehicle that eliminates any of these triggered events, and a smooth transition of your life’s hard-won assets is achieved.
• No Capital Gains - Capital gains tax is a form of tax levied on natural and legal persons, it was introduced on the first of October 2001. The tax normally only comes into effect when an asset is sold that has appreciated in value, there are other instances where the tax will be deemed to have been triggered, one such event is your death, you are deemed to have sold all your assets to your deceased estate. Therefore all the assets that you own at the time of your death, including properties, will attract CGT at a rate of 10% (we will for simplicity sake ignore roll-overs and exemptions for now) this is further exacerbated by the fact that the tax is due in cash, even though no money has changed hands or been received, this could leave your estate in a illiquid position. This can be avoided by merely placing all the assets in trust. The trust does not die and therefore the CGT will not be triggered, saving the investor substantial amount of CGT (10% of the value of the growth of any assets in your estate at the time of your death).
• No estate duty - On the death of an individual the receiver of revenue lurks ever so near to get a further portion of the investor’s estate in the form of estate duties. Any person who dies or who owns property in this country will be subject to Estate duties, please note that this covers all your world-wide assets. This also affects any non-resident or foreign national who has property in this country. The scope of property and assets is very widely defined and covers numerous classes of property and assets and all forms of rights to property, policies, annuities, investments and business. The tax is levied at a rate of 20 % of the net value of any assets you have in excess of 3.5 million, after certain deductions have been made. This is a massive amount of money to have to part with as a result of your death; the real sting in the tail is that this is a tax on after-tax money and assets, and in certain cases, intangible assets such as goodwill, which might be worthless after your death but yet attract Estate Duties.

It is crucial to establish the correct structure in order to ensure that you pay a minimal amount (if not Zero) of death duty. An average estate will pay approx 30% of any net value of such estate. It is important to note that certain assets which are not directly owned by an individual could be deemed to be their assets i.e. Usufruct rights, any interests in property, assurance policies. The latter along with all assets, business properties, movable assets, investments, cash unit trusts, shares, time share are valued and will form part of the estate of the individual, and after certain deductions of debts and exemptions, the net estate in excess of 3.5 million is taxed at 20%.

The solution to this frightening proposition is simple, by establishing the Family Trust and ensuring that all the assets are held by trust, the trust never dies, our law allows for the Trust to continue in perpetuity. On the death of the individual they should pay zero Estate duty.
• No executors fees - The investors death is again a hunting ground for further costs, not only is the estate subjected to CGT, and estate duties but also to executor’s fees. An executor is the person or company or firm that winds up the estate of the individual, for this task they are entitled to a maximum fee of 3.5 % of the gross value of the estate plus VAT in certain circumstances (please note the GROSS value of the estate before deducting liabilities etc). This is one of the most under-stated costs, and the impact is not adequately explained to people. Ordinarily an individual’s gross estate is quite substantial, and accordingly executor’s fees will be substantial. Again the solution to this is the formation of a trust, as the individual will not own any assets, and as all the assets are held by a trust or combination of trusts, the estate should have zero or inconsequential value, thereby eliminating the executor’s fees payable.
• Protection of minors - Our law does not allow for minors to directly inherit, therefore an individual who wants to leave all or any assets to minor persons will not be able to do so, or persons not adequately addressing the issue in their wills or via testamentary trusts will end up with a situation where all the assets will be liquidated into cash. This is the position as the funds or the cash needs to be held by the Guardians Fund. The fund can only hold cash as they do not have the ability or resources to administer assets, this great fund is controlled by the Government, and pays interest of +- 2%. In the event monies are not claimed, they are forfeited to the state, a wonderful thought!
In the interim the minors will have limited or no access to the fund for their needs, education, health, well being housing. Your dream of passing the fruits of your hard earned work in establishing your legacy to heirs is impossible as the Guardians Fund can only hold cash, and all your efforts will come to zero. The solution is to have all your assets and your properties in a trust, as the trust survives your death; any beneficiary may benefit and access assets immediately. Also bear in mind that property administered by your appointed Trustees will accrue at a much better rate than the interest earned in the Guardians Fund.
Saving of costs on death, in establishing a trust a host of costs can be saved as the entity continues in perpetuity.
Donations tax: This is another one of SARS anti avoidance mechanisms; you are not even allowed to give your assets away, other than to your spouse, and certain tax exempt institutions. You are limited to donations of R 100k per annum, this places you in an invidious position, if you wish to give assets or cash to children or parents or family or dependents, if you do you will face a taxation of 20% on any amount over 100k, this can be resolved by making these persons beneficiaries of your trust, a trust is exempt from donations made in pursuance of the trust.

Important: There is no necessity for a trust to terminate, a trust does not die and can therefore continue in perpetuity. This allows for the continuation of the assets 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 fees.

On the death of any individual, their estate is frozen, this is necessary in order for the Executor to wind up the estate, i.e. collect assets, pay debts, taxes, and only after that to make over bequests then distribute benefits to the beneficiaries and Heirs. All the while Spouse and dependants of the deceased have no access to any monies or assets; complex estates could take numerous years between 2-5 years to wind up.

As a Trust holds the assets and cash, they are immediately accessible versus the situation where an individual dies and takes it 2-5 years to wind up, causing unnecessary and untold hardship to the spouse and dependants.






As a professional graduate / practitioner / businessperson / entrepreneur have you seriously considered the following issues?

1. What events could result in jeopardising my financial position in my personal capacity or affect my business?
2. Could a change in legislation affect my business? E.g. Pharmacists and Medical practitioners should seriously consider this one.
3. How do I conduct or carry on my business or practise? Is the business correctly structured? Is the business set up in the most tax efficient manner? Is the business secure? Are the business assets secure?
4. Where are my profits and or dividends flowing?
5. Could my business affect my personal financial status?
6. Could one or more of my businesses affect each other?
7. What is my marital status? Could my spouse’s insolvency affect me or my business or have an impact on my or our assets?
8. Could a change in my marital status affect my financial position or affect my business?
9. Could my spouse’s insolvency result in me being able to practise my profession or take on a position on the board of directors or act as a trustee?
10. Could one or more of my partners, death, divorce or insolvency affect our business and in turn my personal financial position?
11. Are my personal assets secure? Are my business assets secure? Can I continue to carry on or conduct my business or practice with out these assets?
12. Could my staff / personnel affect the future of the business as a result of a claim against the business or as a result of their negligence or acts committed or omitted?
13. In my personal capacity, do I have any creditors?
14. Who or what could be construed or classified as a creditor? A spouse in a divorce action? My bank for unpaid loans, overdrafts, credit cards, home mortgage, store cards, claim from a domestic employee, damages claims, suretyships which could be acted on, If so what would transpire if I could not meet my obligations?
15. Who or what are my business creditors? My clients, customers, patients, suppliers, creditors, financiers, personnel, SARS, landlords, professional regulatory bodies, partners? You will soon realize the list is quite lengthy.
16. What do I stand to lose if a creditor were to make a claim on my assets or business assets?
17. If a partner / shareholder joins or leaves the business or practice, through death, disability or through purchasing or sale, what are the tax consequences?
18. Am I or we in the case of partnership adequately protected and do we have the liquidity or cashflow to deal with any consequences that may flow from an event arising as set out in 13 above?
19. What are the tax consequences of introducing new capital to the business or practice through the introduction of a new partner?
20. Who owns my business? Who controls my business?
21. If I am only a shareholder do I have limited liability? Can SARS or creditors attach my assets even though I am only a shareholder /member of a Close Corporation?
22. Can a creditor or SARS attach or claim assets in a trust?
23. What is my liability or rights in an insolvency or liquidation?
24. Can the business continue with out me or key personnel? Are there solutions to address the latter if the business can not continue?
25. Do I have a succession plan to ensure continuity of the business or practice?
26. Do I know what my estate is worth? Do I have sufficient liquidity in my estate to deal with estate duties, capital gains taxes and executors fees? How can I best minimise if not avoid all the duties, taxes and charges on death to ensure that my spouse, partner, ascendants or descendents get what I intended them to?
27. Do I have a proper estate plan in place? Do I have a will?
28. Are my minor children adequately catered for on the event of my death?
29. What is my total exposure to creditors? What am I really worth?
30. Is my home protected? Should I really retain my home in my name and what are the ramifications if keep the home in name or not?
31. Have I correctly planned for my retirement? Do I have sufficient liquidity and cash flow?
32. How do I exit from my business or practice? What are the tax consequences?
33. Could I be held liable for any claims or taxes even after I sold my shares or portion / percentage of the business or practice?

If you have concerns about any of the above questions and scenarios, you should seriously consider proper personal and corporate structuring to minimize your risk.

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