If you have a trust, now is a good time to revisit your trust deed and check if it is flexible enough to be amended if the government decides to dramatically curtail the present benefits, advises Nico Botha, general manager at Syfrets Private Bank.
Speaking at the first meeting of the Saturday Argus/Syfrets Private Bank Investor Club, Botha said there is life for trusts after the change in the marginal tax rates on trusts made in this year's budget.
While the amendments apply mainly to trusts established for business and trading purposes and do not really affect family trusts, estate planners should not become too complacent about their existing structures.
Several Katz Commission proposals, including capital transfer tax, the anti-generation skipping provision and interest free loans to trusts, are still under review and could affect the future of trusts.
Botha said that apart from checking that you can change your trust if the need arises, a key to using trusts is good record-keeping which should keep you out of trouble.
Important decisions must be minuted and the nature and extent of money collected and distributed must be properly recorded.
He said the widespread use of trusts for business and trading purposes was clearly driven by the preferential tax treatment of trusts compared to companies and close corporations.
Undistributed income in trusts was previously taxed at rates ranging from 17 percent (on taxable income up to R5 000) to 45 percent (on taxable income exceeding R100 000).
From March 1 this year, taxable income up to R100 000 in a trust will attract a flat rate of 35 percent and any amount over R100 000 will be taxed at 45 percent.
If you are the person putting assets into the trust (the funder), any taxable income distributed to your minor child is still taxable in your hands.
Also, where the distribution of income is delayed until the occurrence of a certain event, it is also taxable in your hands if you are the funder, in terms of certain deeming provisions.
Botha said the basis for taxing you as the funder was that you made an interest-free loan to the trust and it was this money that was the cause of the taxable income.
Finance Minister, Trevor Manuel, in his Budget, has also banned the practice of beneficiaries of trusts offsetting losses incurred by the trust against their personal incomes. Again this applies mainly to business and trading trusts.
"A trust will continue to be an important component of estate planning provided it is not driven by income tax considerations and is used as a vehicle for business or trading purposes," Botha said.
Discussing the Budget from a financial planning perspective, Bruce Kirsch, in charge of new business at Syfrets Private Bank, warned that you should not take rash investment decisions as a result of the hike in the tax on the gross interest and net rental income of retirement funds from 17 percent to 25 percent. The substantial reduction this could have on your retirement savings further highlights the need for professional advice.
"You must weigh up the tax saving against the higher risk of being in more aggressive equity portfolios, in investments where the new increased tax is applicable.