Trusts in which assets can be protected from the claws of the taxman or from spendthrift heirs used to be the preserve of the very rich. This is no longer the case. Anyone who expects to die leaving assets of more than R2 million should now consider the advantages of a trust. Trusts came under the spotlight at the recent national Personal Finance/TMA Investment Products Services "Truth about Retirement" seminars. John Kinsley, a general manager of financial services company, Syfrets, detailed the advantages and disadvantages of trusts and how they work for you.
Trusts started gaining attention in South Africa in the mid-80s when there was a sliding rate of estate duty paid on the value of an estate at death, John Kinsley, a general manager of financial services company, Syfrets, told Personal Finance/TMA Investment Products Services Truth about Retirement seminars.
This meant that anything you left to your heirs was taxed at rates between 10 and 35 percent.
However, in 1988, as a result of an earlier tax commission of inquiry, a flat tax rate of 15 percent was introduced with the first R1 million of the value of all your assets being exempt from estate duty. Combined with the fact that no estate duty was payable on assets left by one spouse to another, the result was that estate planning and trusts were "put on the on back-burner by most people". (The exemption for spouses still exists.)
But trusts have soared back into popularity because of three main factors. These are:
* The flat rate of estate duty was increased to 25 percent;
* Inflation. Since the R1 million abatement was introduced in 1988 it has not been increased in line with inflation. Inflation has resulted in you getting "richer" in nominal terms so the chances of paying estate duty on your death have increased considerably although you may not be much richer in real terms (after deducting the effect of inflation); and
* The Katz commission of inquiry into taxation, which has "made people increasingly aware of the need for estate planning".
Kinsley said trusts are a comparatively recent phenomenon in South Africa. Previously estates had been mainly protected through far more complex but less flexible "usufructs" which were established under Roman Dutch law, where assets could be bequeathed to one person but used by another.
"Trusts are an English law mechanism that were only defined in the Income Tax Act in 1992."
TAKE CARE
Special care needs to be taken in setting up a trust for a number of reasons. These include:
* The taxman is watching developments. The Katz commission has already recommended that the growth in value of assets in a trust be taxed at regular intervals. If this tax is introduced at a punitive level or becomes punitive, trusts will need proper escape clauses;
* Beware of off-the-shelf trusts (or one size fits all). Every trust should be designed by an expert to suit your needs;
* Watch out for quirks like when you, the planner, specify in the trust deed that income must only be paid to the beneficiary at some future point. Even though the beneficiary may not want or take the income prior to that future date, the income may still be deemed to be taxable in the hands of the beneficiary, if the beneficiary has a vested right to the income.
COSTS
There are a number of costs in having a trust. These include:
* An initial fee of about R3 500 plus VAT for setting up the trust;
* Registration costs of R104,50;
* On-going administration fees if you have appointed a professional administrator/trustee, of between one and two percent of the value of the assets a year;
* Transfer cost. For example if you transfer fixed property like your home into the trust you will pay transfer fees of 10 percent. If you transfer shares you will pay 0,25 percent in Marketable Securities Tax.