16 October 2019
“My wife is pregnant with our first child and I am considering whether to set up a family trust for estate planning purposes. Lately however I have read negative commentary about using trusts, particularly anti-avoidance tax legislation aimed at trusts. I don’t want to start a family trust if it’s not going to be beneficial. What advice do you have in this regard?”
There has been negative press regarding trusts in estate planning and particularly in respect of tax issues relating to trusts. In particular section 7C of the Income Tax Act, 58 of 1962 has been discussed regularly. In the past it was common practice to sell assets to a trust while extending an interest free loan to the trust. The seller would then donate a R100,000.00 (individuals can donate R100,000.00 per year without incurring donations tax) to the trust every year until such time as the loan was written off and the trust owned the assets.
In terms of section 7C any interest rate of less than 8% in respect of loans to trusts is now regarded as a donation. An amount equal to the difference between 8% interest and the interest actually incurred by the trust will therefore be subject to donations tax. Loans of R1,250,000.00 or less will not attract donations tax, as an 8% interest rate applied to R1,250,000.00 is equivalent to the annual donations allowance of R100,000.00.
Section 7C is of course problematic should a trust be created solely for the purpose of saving on tax and estate duty. However, trusts that are used rather as an estate planning tool hold many other benefits and will always have an important role to play in asset protection.
The following are some of the benefits of the use of a trust as part of your overall estate planning:
- Continuity - a trust survives the life of an individual and can span over multiple generations.
- Protection of assets from creditors and/or matrimonial disputes, because if assets are moved to the trust by the founder, these will no longer be owned by the founder in his or her personal capacity.
- Prevents assets being squandered and ensures better management of trust assets for future generations.
- Protection of the inheritance of minor children. If a will does not make provision for a testamentary trust for minors, any benefit bequeathed to a minor will go to the Guardian’s Fund. There is limited access to these funds and the funds are normally invested at below market interest rates. It is also important to note that only money can be transferred to the Guardian’s Fund, which means that any fixed property will have to be registered in the minor’s name and handed to the legal guardian to be managed. Should it become necessary to sell the property, it will only be possible in terms of an order of the High Court. Fixed property in a testamentary trust can be sold by the trustees at any time if it is in the best interest of the minor beneficiary.
- Tax benefits. A trust for family members can qualify as a ‘special trust’ as long as the beneficiary is still a minor. While trusts normally pay income tax at a rate of 45%, special trusts are taxed as an individual on all income retained in the trust.
Trusts can be used to achieve benefits similar to a usufruct (right of use). For example, a husband can bequeath his entire estate to a trust of which his wife and children are the beneficiaries, subject thereto that his wife will be the sole non-discretionary income beneficiary of the trust until her death.
So, it is clear that trusts are still an important estate planning tool and continue to offer protection and use if utilised correctly. It remains a specialised planning tool and it remains advisable to have the assistance of a fiduciary specialist when deciding to set up a family trust.