Trusts and Estate Planning

Trusts and Estate Planning

How Much Can You Trust Your Trust?

Feb 28 – Mar 1, 2009. Trusts today perform a crucial role in protecting assets and are frequently recommended by estate planners. However, the legal and taxation landscape constantly changes, resulting in unintended consequences for the unwary.

Trusts must be correctly established and carefully managed. This was specifically highlighted in a recent divorce case that was argued before the Supreme Court of Appeal in the case of Badenhorst v Badenhorst 2006(2) SA 255(SCA). In this case, the Court decided that while the assets were on the face of it held in trust, they were in fact under the control of Badenhorst, who was one of the trustees. Therefore the trust was essentially a sham. For Badenhorst this had serious consequences. All the assets were deemed to be owned by him personally, and had to be equitably shared with his wife in their divorce proceedings.

A trust is essentially a collection of assets and liabilities vesting in the trustees to be administered by them in terms of the trust deed for the benefit of the beneficiaries.

The trust deed is a legal agreement, or contract, between the founder of the trust and trustees, which sets out how the trust is constituted and how it is to be administered. It expressly sets out that all transferred assets become trust assets under the sole control of the trustees.

The Trust Property Control Act regulates trusts and requires that all trust deeds are registered with the Master of the High Court. No person may act as a trustee until they have been issued with letters of authority to do so by the Master.

Trusts have been used for many years as an integral part of financial and estate planning. However the cost of owning assets in trust has, in aggregate, become more expensive in terms of capital gains taxes, income taxes and fewer income tax avoidance opportunities. In addition, the cost of administering a trust has also increased, as it is imperative that independent trustees are included. Add to this the risk of being declared a sham trust in court and the whole exercise could end up being a waste of time and money.

The primary purpose of a trust should be to put assets under the control of others who can act in your place for your beneficiaries. This allows continuity in the event of death, absence and incapacity, separating the enjoyment of capital and income and the management of it. This is particularly important in the case of minors, or major beneficiaries who are not good with finances or are incapacitated. Protection from creditors is a real advantage too.

The most recent Budget also included some amendments as far as estate duty is concerned, with the intention of simplifying estate planning and in essence reducing the need for trusts. In the past you would likely bequeath R3.5m of your estate to a trust, and then the balance of your estate to your existing spouse. The amendments now allow the R7m abatement (R3.5m for each spouse) to be fully utilized between both spouses. If Spouse A (the first-dying) only utilizes R2m of the abatement on their death, the balance (R5m) may be used by Spouse B on their death. One word of caution – Spouse A may only use up to a maximum of R3.5m on their death. This may make you re-look the need to utilize a trust. As Charles Evison of the Louis Group advises: “Any such review should be made together with your professional Estate Planner or Financial Adviser as there may be reasons for using a trust in your estate plan other than to reduce your estate duty liability. These could include protection of beneficiaries as discussed above or deferring the imposition of any capital gains tax which may become due on your death.”

Where the founder, trustee and beneficiary are the same, extra care is required to ensure your trust is not set aside.

To avoid the pitfalls relating to trusts which have recently come before our courts consider the following:

  • Know and understand the duties of trustees arising from both the Common Law and Trust Property Control Act;
  • Carefully read and understand the provisions of the Deed of any trust of which you are a trustee;
  • Comply with all the administrative requirements of the Deed, especially those regulating what the trustees are empowered to do and how the decisions of the trust are to be made;
  • Ensure that a qualified independent trustee (preferably a lawyer, accountant or a trust company) is appointed to the trust and that the independent trustee is party to all trust decisions;
  • Keep a minute book recording all the decisions of the trustees and books of account recording the trust’s financial dealings;
  • Ensure that letters of authority exist for each of the Trustees, and that at all times there are as many trustees appointed as required by the trust deed; and
  • Remember that the fundamental principle of trusts is the separation of ownership and enjoyment.

Trusts and Estate Planning

Assumptions:
Mr Smith purchases a holiday home for R2.5m in 2007
He is a 40% taxpayer and his estate exceeds R3.5m
The value of the holiday house grows at 10% pa
Mr Smith dies in 10 years time
He made use of his annual R100,000 donations tax exemption to reduce the loan account in the trust

Calculations:
CGT calculated as follows:
(R6,500,000 – R2,500,000 – R120,000) x 25% inclusion x 40% marginal rate
Estate Duty calculated as follows:
(R6,500,000 – R388,000 – R259,350 – R30,000) x 20%
Executor fees calculated at 3.99% (3.5% + VAT) on gross estate
Additional Transfer Duty on purchase:
(R2.5m x 10%) – (R2.5m on sliding scale (2.5% on 1st R1m, 8% on balance))
Trust Administration Costs calculated at R1,000 pm for 10 years (Trustee + Accounts + Tax)

Ian Beere CA(SA) CFP is a partner of Netto Financial Services and was the financial planner of the year in 2007.

His business partner Debbie Netto-Jonker, CFP, is founder of Netto Financial Services and was financial planner of the year in 2001.

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