There are a number of benefits to placing assets in a trust for estate planning purposes. These advantages include, among others potential estate duty benefits as well the future protection of assets.
How do I move the assets into the trust and will it immediately be shielded from my creditors?
One can simply sell one’s assets to a trust by way of lending the money to the trust to fund the sale. This is recorded as a book entry sale. If it is not recorded as a sale it will be deemed a donation, and this can be problematic, since any donation over R100,000 per year will be subject to donations tax of 20%.
When the assets are sold to the trust, the trust does not pay you for those assets. Rather the trust opens a loan account and owes you the money. This loan account is seen as an asset in the transferor’s personal estate. Whilst a Trust offers asset protection against creditors, it is important to note that whilst there are loans or claims against the trust by any person, the trust could be exposed to creditors of that person. It is therefore important to reduce the value of the loan account to nil as soon as practically possible. The way in which the trust is administered, and the accounting procedures that are implemented, will assist in the reduction of the loan account during your lifetime. The intention here is to reduce the loan account as efficiently as possible during your lifetime so that the value is considerably reduced with the result that you will pay less in both executor’s fees and estate duty due to the smallest possible value of the loan remaining in your estate upon your death.
There are three main ways of reducing such a loan account:
Both husband and wife may donate R100,000 each year to the Trust. This donation has to be an actual donation i.e. the money must be deposited into the Trust’s bank account if it is not to attract capital gains tax. However, if one is to rely solely on the donation vehicle, the loan account may of course reduce very slowly depending on the initial size of the loan. On this point it might be worth noting that trying to sell assets to a Trust at far below market value will also attract donation tax.
Another form of reducing the loan account is via rentals. The assets in the trust could be rented to oneself and/or one’s family at the depreciation cost as well as the upkeep costs of the assets. If the rentals always equal the depreciation cost of the assets there will be no income tax implications. The rental is not an amount that physically needs to be paid by the trust. Since the trust is now owed rent and in turn still has outstanding debt in the form of the loan account, the two debts may simply be offset against one another – the net effect being to reduce the loan account. Once again it is not appropriate to set the rental at unrealistic levels and the rental should be in line with the going rate in the area and for that type of asset.
The trust may have investments such as shares, endowments and unit trusts. When you need money for yourself and your family (education, holidays etc.) you can draw the money from the Trust and in this process reduce/recall you loan account.
Future money and profits from business shares or properties held in the Trust will also flow directly into the Trust without increasing your loan account and drawings against this money will further reduce your loan account.
Should my loan account not be fully paid up during my lifetime, what options are available to ensure the most tax beneficial treatment of the remaining loan in the event of my death?
In your will, the loan account against your family trust can be bequeathed to:
- A surviving spouse, including a future spouse who may not qualify as a beneficiary because the trust deed cannot/was not varied to cater for the spouse; or
- A child; or
- Any other inheritor other than the family trust; or
- A separate/another inter vivos trust; or
- A testamentary trust created in the same will.
It is clear from the above that the goal is to have no loan account which could attract claims by creditors, and this can be achieved predominantly via regular donations, rentals and drawings. Accordingly, the sooner you start, the quicker you protect your assets.