In the previous two editions we highlighted the risks that every small business owner faces, the different options to minimize this risk as well as the importance of having a valid Will.
In South Africa, we only really have one solution for risk management and that is the so called Trust.
A well-structured Trust plays the following vital roles and can be implemented whether you are a business owner or a normal salary earner:
- Save Tax
- Protect your assets
- Effortlessly transfer of wealth from one generation to the next
We typically encounter two types of trusts:
1. Testamentary
This trust is formed upon your death and in accordance with your last wishes included in your Will. In the previous installments we touched on the Guardians Fund and the repercussions it may have on your estate. If you operate your personal affairs in your personal capacity or are a single parent, it is imperative that you’re Last Will and Testament includes the formation of a Testamentary Trust.
2. Inter Vivos
This is a trust that is formed while you are still alive and it continues to the benefit of the beneficiaries after your death. This will form the focus of our discussion and is elaborated on below.
How do I form a Trust?
The Founder of a Trust is the person that donates assets to a Trust, to be administered by the Trustees to the benefit of the beneficiaries.
The Trustees are there to manage the affairs of the Trust with due care and the relevant skill. The personal assets of the Trustee are separate from the Trust and should the Trust be sued, their personal assets won’t be at risk unless they signed personal surety. The Trustees also have no vested interest in the assets of the Trust, unless they are beneficiaries as well.
One of the trustees must be an independent person, to prove to the Receiver of Revenue that you are not in complete control of the assets. It can be any professional person such as your accountant or financial planners, but may not be any family members. (Not even extended such as cousin)
The only reason a Trust is formed is to benefit the beneficiaries. Any natural persons or a Trustee acting on behalf of a Trust may be a beneficiary.
There are two types of beneficiaries
- Capital beneficiaries – entitled to the capital, i.e. the assets, and
- Income beneficiaries – entitled to income generated by the assets
What are the benefits should I choose to run my affairs through a Trust?
- Asset protection from creditors and divorce
- Savings on:
- Income Tax
- Estate Duty
- Capital Gains Tax
- Executors Fees
Why are my assets protected if they are owned by a Trust?
Well, the answer is twofold:
Firstly, you are distancing yourself from your assets , implying that if you were sued in your personal capacity, any creditor would not be able to attach your personal belongings, as they are owned by the Trust, and
Secondly, you are able to separate your personal assets from your business assets by implementing a single or multiple trusts, allowing you protect all of your assets.
Which assets should I place in the Trust?
- All your personal belongings such as jewellery and household furniture
- All fixed property
- All your investments
- Your business (through the membership in a cc or shareholding in a company)
- Your life assurance policy
It is important to note that if you want a Trust to own your life insurance policy, you will have to take out a new policy with the Trust as a primary beneficiary. Should you simply cede a life insurance policy to a Trust, it will trigger a capital gains tax event with tax consequences.
What are my tax savings when it comes to my deathbed expenses?
Let’s firstly look at the different rates at which we will be taxed
| Individual | Trust | |
| Estate Duty | 20% | Nil |
| Executors Fees | 3.99% | Nil |
| Marginal Rate Capital Gains Tax | 10% | 20% |
This means that more than 30% of your estate will be used to pay your deathbed expenses!
Let’s now apply these rates in the following scenarios:
1. The trustees sells the assets and keeps the proceeds in the Trust
Estate Duty : Nil
Executors Fees : Nil
Capital Gains Tax : 0 – 20%
Deathbed expenses total 20% vs. more than 30% in your personal name.
2. The trustees sells the asset and passes the proceeds to the beneficiaries
Estate Duty : Nil
Executors Fees : Nil
Capital Gains Tax : 0 – 10%
Deathbed expenses total 10% vs. more than 30% in your personal name.
3. The trustees keeps the assets after your death
Estate Duty : Nil
Executors Fees : Nil
Capital Gains Tax : Nil
There are no deathbed expenses payable in this scenario.
Also make sure you read: How to transfer property without paying tax
