Moving assets to a family trust – South Africa

Moving assets to a family trust – South Africa

What are the important considerations when moving assets into trust? This question about moving assets to a family trust was posed in Personal Finance magazine, in the 2nd quarter of 2013. Netto partner Ian Beere was asked to advise.

Question: I need advice on whether moving assets to a family trust is desirable in the following  situation

My three brothers are members of a close corporation (CC) that owns a building with residential and commercial tenants. The building was built in 2005 and the present value is about R4 million. The reason for forming the trust would be to avoid any financial implications should any of the members die. If the deceased’s family claimed its share from the CC, the  remaining members might not be in a position to pay them out. Furthermore, the building is a family legacy. The family feels that moving assets to a trust would protect the building for the next generation.

We understand that forming a trust is very expensive and that tax on trusts in South Africa can be heavy. Please advise?


As I understand the  situation, the family is concerned that the heirs of a deceased brother might want the property to be sold so they can access their capital. The remaining brothers would then have to start again on a smaller scale.

The vision is that the families of the brothers should benefit from the income from the investment for the foreseeable future.

Moving assets – some legal background about trusts and close corporations

A trust or a CC is a legal ‘person’ that can own assets and receive income. In this case, the brothers own the CC and the CC in turn owns the  property. The income from the property is paid to the CC in the form of rent by the tenants and that income is first used to pay expenses, after which the profit  is distributed to the owners in proportion to their ownership percentage. This distribution is called a dividend.

Moving assets – what if the property were owned by a trust, not a CC?

A similar situation would apply if the property were owned by a trust. The distribution of profit from a trust is usually taxed in the hands of whoever receives it, which means you can end up paying less tax by distributing the profits to each member of the family, instead of to just one beneficiary. Under current legislation, direct ownership of the property by a trust would be more efficient than ownership by a CC, but proposed tax law changes announced by the Minister of Finance in his Budget speech in February may result in there being  little difference between the two in future.

 What’s the difference between a CC and a trust?

1. No one can ‘own’  a trust: this is the fundamental difference between a CC and a trust. You can start a trust (by being the founder), you can control a trust (by being a trustee) and you  can enjoy receiving income from a trust (as a beneficiary).

2. A trust does not form part of a deceased estate: as a trust is not something that you own,  it does not fall into your estate on your death. Thus it can continue to be run in accordance with the trust deed after your death. A CC, on the other hand, is an asset in your estate and needs to be sold or transferred to your heirs.

So, should this family property be in a trust?

Yes, as the primary objective of the brothers is to provide income and a legacy to the family; a trust is the ideal vehicle for the situation, because it ‘lives’ beyond the lifespan of the founding beneficiaries. In fact if they had used a trust instead of a CC initially, they might have saved some tax already. In addition, the cost of running a trust should be similar to the cost of running a CC, so there are no unpleasant surprises there.

What are the issues to consider when setting up a trust?

Setting up a trust can cost between R4,000 and R12,000. Careful consideration must be given to the wording of the trust deed because you want to ensure that the trust is both tax effective, and also that your family will continue to benefit when you die.

Take care to consider how the trust should be managed after the deaths of all the brothers. Where the income from a trust is split between many beneficiaries of the second generation, conflict can arise as different family members jostle for control.

Moving assets from the CC to the trust

The challenge in moving assets from the existing CC to a trust is that it will cost you in terms of capital gains tax and transfer duty. There will also be VAT considerations. There are three possible options to consider.

Option one would be to sell the assets of the CC to a trust and then close the CC.

Option two would be to transfer the ownership of the CC to a trust and keep both going. You would be well advised to look at this with your accountant, who will be able to advise you of the costs and benefits of each option. While option two is likely to be cheaper from a tax point of view, it will be more expensive to run, because you will have two entities.

Option three is that the brothers could enter into a buy-and-sell agreement, supported by buy-and-sell insurance on each other’s lives. This will have the effect of paying out any deceased member’s share value to his family, leaving the remaining two as the sole owners.

While option three solves the estate problem at a much lower cost than transferring the property, it probably does not reflect the family’s vision. At this stage, the members’ agreement is an important document regulating how the members of the CC deal with each other. This agreement can also be used to achieve certain objectives in the event of the death of a member. A good planner or tax attorney may be able to recommend a change to the members’ agreement that solves the problem in event of death without it costing a lot of money right now. How the brothers’ wills are worded may also be an important consideration in planning effectively.

As always, objective legal and financial advice before moving assets can pay you back in saved taxes, not to mention red tape and bureaucracy.

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