South Africans are experiencing the economic crunch in a real way. While the majority of citizens are increasingly struggling to put food on the table, more affluent individuals are re-evaluating financial plans and looking at different ways to secure savings and accumulated wealth.

In this challenging and uncertain economic and political climate that the country is undergoing currently, the first thing we should remind ourselves of is to remain calm. It is reason based on the right knowledge, and not emotion that should be our guide in decision-making. It is therefore important to examine financial options and make wise decisions to ensure that your financial plan stays on track. Being strategic in our planning for the future is increasingly important.

In this article, Ultima Financial Planners’ looks at TRUSTS as one of the options, and where it is still highly effective in long-term financial planning.

For many years trusts have been effectively used as wealth management and estate planning vehicles.  Recent regulatory changes have threatened the existence of the trust as an independent legal entity due to the increased scrutiny into trusts from SARS and the onerous effect of the new legislation imposed.

Hugo van Zyl, chartered accountant and master tax practitioner at Breytenbachs Cross Border Advisory, says there is a real possibility that the number of trusts will drop considerably. This is not only the case for so-called active trusts but also for smaller trusts holding a single (for family use only) property, which may be regarded as inactive.

While one tax commentator at the recent 2016 Tax Indaba, suggested that up to 50% of all trusts might disappear as a result of clean-up efforts, Hanneke Farrand, director in ENSafrica’s Tax Department, says she does not necessarily agree with this view.  Farrand says regulatory changes will improve compliance and create an awareness to keep proper records and pay attention to trust administration. However, Van Zyl says that taxpayers with low value trusts, serving no real commercial purpose “should probably get rid of it”.

What are the benefits of a trust?

There is no tax on the accumulation of wealth within the trust, unlike estate duty which has relevant tax associated. The combined effect of Capital Gains Tax (CGT) and death duty for an individual is still higher than the CGT rate within trusts. The conduit principle, for as long as it remains, provides a tax efficient option for distributing income and capital gains between various trust beneficiaries.

A trust provides a mechanism for trustees to distribute assets to beneficiaries without donations tax, an option which would not be available to a settlor directly without paying donations tax of 20% on the transfer of assets exceeding R100 000 p.a.

Trusts provide tax liquidity solutions on death. On death, CGT is payable on the growth of assets held by an individual, whether the asset is disposed of or not. In a trust, CGT is only triggered on distribution or sale of the asset, hence matching tax liability to cash flow. For example, a family holiday home intended to be held for multiple generations would be better held in a trust. CGT on the growth of the asset would only apply when the asset is sold. Conversely, if the holiday home is held in the parent’s name and transferred to the next generation of children upon death of the parent, CGT would apply to the growth of the property. Without cash flow being available to fund the CGT tax liability, the property might have to be sold instead of the intended transfer taking place. Another factor to take into consideration when held in the parent’s name is that the basic cost of the property increase with each transfer which also increase the CGT while within a trust the basic cost remain the same.

From a planning point of view, trusts continue to offer protection of assets against creditors and a structure for administering assets for beneficiaries who may not otherwise be competent enough to manage their own financial affairs.

Ten areas where trusts should be considered.

Ultima Financial Planners has evaluated the relevance of trusts and identified ten areas where these financial vehicles are still very relevant in terms of financial planning:

1. Provision for minor beneficiaries.
2. Provision for beneficiaries who suffer from a mental illness or physical disability.
3. Capital gains tax saving at death on assets held in a trust.
4. Protection of assets in divorce – this however is a sensitive area and the trust should be set up carefully to take all parties’ rights into account.
5. Protection of assets against creditors.
6. Reduction of executor’s fees and administration costs at death.
7. Provision of continuity and easy succession of interests in property.
8. Splitting of capital gains between beneficiaries in circumstances where the attribution rules contained in paragraphs 68 to 73 of the Eighth Schedule of the Income Tax Act (58/1962) are not applicable.
9. Income splitting between beneficiaries in circumstances where the attribution rules contained in section 7 of the Income Tax Act (58/1962) are not applicable
10. Offshore trusts, diversifying a client’s portfolio however only where legislation allows.

Trusts are still very relevant and especially within our current economically volatile environment, albeit to solve a specific challenge. We recommend to our customers, given the areas discussed, to consider trusts as wealth management or estate planning vehicles.

Sources:
http://today.moneyweb.co.za/article?id=615183#.WN5UDfmGMdU
http://www.thesait.org.za/news/308317/The-Future-of-Trusts.htm
https://www.bdo.co.za/en-za/news/articles/the-trust-as-a-planning-vehicle-not-dead-yet