Our sincere apologies for the substantial delay in rolling out our fourth and final article on trusts dealing with the tax and other benefits which flow from conducting one’s affairs through the medium of a trust.
There are a number of potentially significant tax and other savings which one is able to achieve by the formation of a discretionary trust, not the least of which include:
- No estate duty. Estate duty applies on the death of an individual. Whilst there is currently a primary rebate of R3.5 million (which therefore exempts the estate of any person up to this amount from payment of estate duty, estate duty in respect of individual estates exceeding R3.5 million can be significant, since it spans a great number of classes of property and assets including, amongst others, property, business assets, investments, policies and annuities. What makes matters worse is that this is, in effect, a further tax which is applied to money and assets in respect of which tax has invariably already been paid. By vesting ownership of significant assets in a family trust, the trust may be structured such that it survives you, and may even persist in perpetuity, thereby visiting substantial savings on your estate.
- No capital gains are payable. Whilst capital gains is a type of tax which is levied on both natural and juristic persons, it generally only comes into effect from the sale of an asset which has appreciated in value since the date upon which it was acquired, or since the date upon which a valuation has been placed on the asset for capital gains purposes. On death, one is deemed to have effectively sold one’s assets to one’s deceased estate, as a consequence of which all assets owned at the date of death which have appreciated in value will, in general, attract capital gains tax which may be payable, even though the asset has not been realised and no money has therefore been received for it. This can obviously have a disastrous effect on one’s estate and can cause the estate to become illiquid, thereby making it necessary for assets to be sold in order to generate liquidity. Again, capital gains can be avoided merely by placing one’s assets in a trust which, as before, may be structured so as to survive you.
- No executor’s commission payable. An executor, self-evidently the person appointed to wind up your estate, is generally permitted so-called executor’s commission of up to 3.5% of the gross value of the assets in a personal estate. It is important to note that the calculation of executor’s commission is based on gross assets, which means that liabilities are not offset against assets for the purpose of calculation of executor’s commission. It becomes obvious, therefore, that executor’s fees can materially impact the residue of the estate distributable to nominated beneficiaries. If a trust is registered, and the significant assets of the individual vest in the trust, it follows that the personal estate of the individual is significantly reduced, and that executor’s commission on that individual’s personal estate also concomitantly reduced.
- Donations taxed may be avoided. As you are aware, your ability to effect donations during your life time without attracting hefty donations tax is extremely limited and both significant and adverse donations tax consequences may flow from donations (other than to tax exempt institutions) made during your life time. However, those whom you might otherwise intend to benefit by way of donations during your lifetime may quite simply be nominated as beneficiaries of your trust, since the trust itself is exempt from tax in respect of donations made in pursuit of its objectives. Again, the trust deed may reflect that it is a trust which will survive you, and perhaps even exist in perpetuity, thereby allowing future generations to benefit from your not insignificant life time efforts at a considerable saving.
- The protection of the interests of minors. Whilst minors are not permitted to directly inherit, and whilst you may make provision in your Will for an executor or executors to benefit minors in deserving cases, a trust undoubtedly provides a preferable vehicle through which to comprehensively outline the powers of trustees, and to therefore enable trustees to exercise a discretion in the best interests of minor beneficiaries.
- The frustration of a frozen estate. You have no doubt often heard about the enormous frustration often experienced by spouses or other dependents of deceased breadwinners in accessing necessary financial resources, in particular in the months immediately following the death of the breadwinner. Whilst there is provision for an executor to make payment to beneficiaries early during the winding up of a deceased estate, these circumstances generally need to be fairly exceptional. The period between the date upon which an estate is reported and the date upon which the Master issues so-called letters of executorship to the executor can be anything up to four months or longer, and for as long as an executor is not formally appointed to the estate, a vacuum exists. It only upon his/her appointment that an executor is in any event able to commence the liquidation of the estate and gather estate assets. If such assets in cash are held by a trust, however, the nominated trustees of the trust who may survive you are empowered to immediately utilise trust assets and cash to cater for what would otherwise be a torrid period for dependents to have to endure if the estate assets had been owned and held by you individually.
It therefore becomes obvious that a great many significant advantages are to be obtained through the registration of a discretionary family trust. The registration of a trust itself is relatively inexpensive and extremely straightforward, and a trust also lacks the more formal accounting requirements to which companies are generally subject.
You are invited, without cost or obligation, to have a chat to us concerning the potential registration of a discretionary family trust or any other type of trust (such as a charitable or commercial trust) which suits your specific requirements. We would love to hear from you.