Advantages of a trust

There are a number of advantages to placing assets in a trust for estate planning purposes. These advantages include:

1. Saving on estate duty. The growth on assets, such as shares, transferred to a trust is not subject to estate duty, because the growth belongs to the trust. If you have made use of a loan to the trust, the value of the assets as at the date of transfer remains an asset of your estate because of the loan account in your estate.
2. A trust does not die. This means that a trust is not liable for estate duty, other taxes or costs, such as transfer duty, executor's fees, or conveyance fees, that would be payable in the hands of your estate or heirs. Also, the trust does not pay CGT as long as an asset is not sold.
3. Fixing value. The value of any assets transferred to a trust is effectively frozen for estate duty purposes.
4. Trusts continue to pay benefits to dependants (beneficiaries) after you die. On the other hand, assets in your estate may not be freely available to your dependants, because your estate is frozen during the winding up process. This may result in your dependants not receiving an income until after your estate is finalised.
5. Protection of assets. A beneficiary cannot sell a right in a trust (unlike shares in a company). If a beneficiary becomes insolvent, the assets in the trust continue to be protected (unlike shares in a company). Likewise, if you, as the donor, or the trustees become insolvent, the trust's assets remain protected.

 

Tax-efficient income splitting

Income from a trust can be structured in a number of ways to provide tax efficiency. For example, R100 000 earned by a trust can be split between five beneficiaries so they earn R20 000 each. Assuming they earn no other income, they would pay no tax as this amount is below the tax threshold.

Asset protection

The term "asset protection" is commonly misunderstood. Many believe that it refers to the techniques used to shield a debtor's assets from creditors' claims. Because it is impossible to "bulletproof" a debtor, asset protection involves structures and techniques that make it more difficult and expensive for a creditor to reach a debtor's assets. The objective is to change the creditor's economic analysis, making the pursuit so difficult and expensive, the creditor will either give up or be willing to negotiate on terms more favourable to the debtor.

Asset protection does not deal with secrecy or hiding assets. Hiding assets is an ineffective means of shielding them from creditors because a debtor would usually have to disclose his assets in a debtor exam, under penalty of perjury. A properly structured asset protection plan allows the debtor to reveal the nature and the structure of the plan without sacrificing its efficacy. The general proposition underlying asset protection is that a creditor can reach any asset owned by a debtor, but cannot reach assets not owned by the debtor. Consequently, the focus of all asset protection planning is to remove the debtor from legal ownership of assets, while retaining the debtor's control over and beneficial enjoyment of the assets.

Asset protection that works must be very practical. The planning is done within a statutory framework, but it is the practical implications of the planning that shape the exact nature of the structures and techniques. For example, a creditor may be able to make a successful legal argument that a given structure should not stand, and thus be able to retrieve the debtor's assets. But, if making such an argument will be sufficiently expensive and time consuming, the creditor may never make it. Practitioners must take into account both the substantive legal issues and the practical aspects of a plan. This article will focus on the more practical aspects and results of asset protection planning, touching on the underlying substantive law only in passing.

Several different factors determine the nature and the type of planning that should be used for a given client. The three most important factors are: (i) the identity of the creditor pursuing the client, (ii) the nature of the assets that will be pursued by the creditor, and (iii) the extent to which the debtor is willing to go to protect his assets. The identity of the creditor refers to how aggressively the creditor will pursue the debtor's assets, and how knowledgeable the creditor is about debt collection laws. The more aggressive and knowledgeable the creditor, the more obstacles we need to erect in his path. The nature of the assets refers to the specific assets owned by the debtor. There is no "magic bullet" asset protection strategy; different structures are used to protect different types of assets.

The extent to which the debtor is willing to pursue asset protection is important in determining the appropriate strategy. Some debtors may be willing to do nothing more than shuffle paper agreements, whereas others may be willing to go through a divorce, move assets offshore or sell their home. Practice Pointer: All asset protection planning implicates income, transfer and property tax issues, and fraudulent transfer laws. While a discussion of these issues is beyond the scope of this article, it should be noted that many debtors approach the fraudulent transfer analysis from a very practical perspective, as follows. Assume the debtor is facing a significant lawsuit risk with a large anticipated judgment. The debtor has two asset protection choices: (i) do nothing and stand to lose all assets when the plaintiff becomes a creditor, or (ii) engage in some asset protection planning. Because the common downside of a fraudulent transfer is the creditor's ability to set aside the transfer, a debtor may have nothing to lose (other than the transaction costs) by engaging in planning that may (or may not) be deemed a fraudulent transfer. From a creditor's perspective, a successful fraudulent transfer challenge gives the creditor the legal right to pursue the transferred assets. Having a legal right to do something does not mean having the actual ability to do so, and does not mean that the pursuit of the transferred assets would be cost effective.

Protection of assets against creditors

A discretionary trust enjoys creditor protection in the event of the trust beneficiary's insolvency. The assets of the trust are held by the trustees and the creditors who are the beneficiaries cannot attack the assets if the beneficiaries have no vested rights to the assets.

Estate duty and related savings

Estate duty and related savings are achieved by divesting oneself of ownership of growth assets in favour of a trust. In so doing for as long as the trustees keep the trust going and retain the assets for the unvested and unspecified benefit of the planner’s descendants no estate duty need be paid on the death of the descendant.

Definition and Duties of Trustees

The trustee can be either a person or a legal entity such as a company. A trust may have one or multiple trustees. A trustee has many rights and responsibilities; these vary from trust to trust depending on the type of the trust. A trust generally will not fail solely for want of a trustee. A court may appoint a trustee, or in Ireland the trustee may be any administrator of a charity to which the trust is related. Trustees are usually appointed in the document (instrument) which creates the trust.
A trustee may be held personally liable for certain problems which arise with the trust. For example, if a trustee does not properly invest trust monies to expand the trust fund, he or she may be liable for the difference. There are two main types of trustees, professional and non-professional. Liability is different for the two types.

The trustees are the legal owners of the trust's property. The trustees administer the affairs attendant to the trust. The trust's affairs may include investing the assets of the trust, ensuring trust property is preserved and productive for the beneficiaries, accounting for and reporting periodically to the beneficiaries concerning all transactions associated with trust property, filing any required tax returns on behalf of the trust, and other duties. In some cases, the trustees must make decisions as to whether beneficiaries should receive trust assets for their benefit. The circumstances in which this discretionary authority is exercised by trustees is usually provided for under the terms of the trust instrument. The trustee's duty is to determine in the specific instance of a beneficiary request whether to provide any funds and in what manner.

By default, being a trustee is an unpaid job. In modern times trustees are often lawyers or other professionals who cannot afford to work for free. Therefore, often a trust document will state specifically that trustees are entitled to reasonable payment for their work.

Trusts

 

A Trust is a separate legal entity which exists apart from the individuals who control it and benefit from it. It has its own bank account and submits its own tax returns and may draw up its own annual financial statements.

Advantages of a trust

 

1. As it is a separate legal entity it cannot be attacked by your creditors unless it has signed surety.
2. It gives you great savings on estate duty on your assets when you die. Currently estate duty of 20% is payable on every rand above R3.5 million of assets an individual owns.
3. It allows the assets to continue operating when you die as most trusts have a clause nominating a beneficiary or other person to become a trustee on your death. As an individual your estate would be frozen on death.
4. It is an attractive and neat vehicle for you to house and build up all your assets in.
5. If it is a discretionary trust, the income received and distributions made may go to any beneficiary at the discretion of the trustee.

Persons involved in a trust

 

• Donor/Founder – this is the person who donates a nominal sum of as little as a R100-00 so as to get the trust formed. The Donor should be a close relation such as a parent or sibling.
• Trustees – these are the persons who control the assets of the trust and make decisions as to which assets to purchase or to dispose of. The trustees need to be independent and 3 trustees are normally considered a good number. The trustees are normally yourself, your spouse or a close friend and a third independent person being your attorney, accountant, business advisor or wise mentor.
• Beneficiaries – these are the persons who benefit from the trust and are normally your children and could also be yourself and your spouse or any other person you may wish to nominate.

Administering your trust

If a new asset is purchased, it should be paid out of the trust bank account, it is then entered into the trust’s books of account.

You can sell assets you currently own to the trust whereby you create a loan account and the trust owes you money. This does require a detailed explanation.

Did You Know

The estate of a deceased person must be reported to the Master within 14 days from date of death.

This is in terms of the Intestate Succession Act, 81 of 1987.

 

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