Setting up a trust requires careful evaluation and sound financial advice.
People set up trusts for different reasons. They, like good financial solutions, have unique properties, which can help you meet your goals. However, if not set up properly however, they can be a hindrance to your plans and ultimately a disaster.
Before setting up a trust, answer three important questions with the help of a qualified financial planner, says Floris Slabbert, Country Manager at Ecsponent Financial Services:
- What is the purpose of the trust?
- What assets do you want to incorporate and how will you do it?
- What is more appropriate – a living (inter-vivos) trust or a testamentary trust. If it is a “legacy-planning” situation, a testamentary trust (established after death) may be more appropriate than a living trust?
Slabbert explains the intricacies involved when working through the third question: “Legacy planning is where a person prepares a financial strategy, usually with the help of a financial advisor, to bequeath his or her assets to next of kin of a loved one after death.
“A living trust is a legal document created during a person’s lifetime. Just like a will, a living trust spells out exactly what your desires are with regard to your assets, your dependents, and your heirs. The big difference,” explains Slabbert, “is that a will becomes effective only after you die and your will has been submitted to the Master.”
He adds: “A testamentary trust is established through the provisions of a last will and testament. These provisions stipulate the details about how a person’s assets must be divided and distributed. This often includes the proceeds from insurance policies in respect of the life of the deceased. One will may be more than one testamentary trust per will.”
Once it becomes clear that it is necessary to establish a trust, you need to consider a host of factors. These range from tax implications – both present and future – legislation, death and intricacies unique to the management of trusts. Make sure you understand the purpose of your trust and the responsibility of a trustee.
There is a misconception that trusts eliminate or at least reduce tax burdens. Beware that they can do the opposite and create additional tax liabilities if not structured properly. In this instance, the help of tax expert is invaluable. SARS will always try to maximise revenue. Hence, legislation can change unexpectedly to close so-called ‘tax-bleeding’ holes,” warns Slabbert.
There is a lot of red tape. “As a start, everyone involved must comply with FICA requirements. In the case of living trusts, trustees must conduct themselves in a way that shows they are responsible, involved and present at general meetings. Trusts are subject to increased scrutiny from tax practitioners and even beneficiaries do not hesitate to challenge a trust or trustee in court.”
Despite the legislation that prescribes the governance of trusts, many people, says Slabbert, misunderstand the financial implications of transferring ownership of an asset to a trust. The legislation is complicated and changed recently, putting trust-held assets at risk.
For example, legislation governing business property trusts was changed from 1 March 2017. Among other chances, it entails that a business trust can no longer accept interest-free loans. This makes it more expensive to buy property via these trusts as the minimum prescribed interest rate is now repo rate plus one percent.
Also take note of the lender’s death affects a trust. Without enough life cover to deal with the fees and taxes, the trust will have to recover those fees to pay the estate.
“Ideally, the trust should be the beneficiary of life cover on the donor(s) life,” advises Slabbert. “This puts the trust in a position where it can redeem the loan account. If the trust then does not deduct the life cover premiums over the course of the lender’s life, it will not pay taxes when the policy pays out. Yet, at the very end, your estate will end up donating the funds received from the trust, back to your trust, which then incurs estate duty above the normal abatement.”
A donation to a trust will immediately be taxed at 20% if it exceeds R100 000 per year and is payable within three months of the donation taking place. If the donor doesn’t pay the donation tax, the trust has to pay it within ninety days. If not done, SARS will charge interest to both parties.
A trust can bring burdens, but also save a lot of money, while operating within legal bounds, if one knows how! A business property trust, for example, can reduce expensive property transfer duties and bond registration costs when the company’s shareholding, under the trust, is sold to a buyer,” says Slabbert.
If the purpose of your trust is to make provision for your children, it would be more beneficial to have a trust “mortis causa”, after you pass away, he advises. “This allows for significant tax abatements, which are capped at R3.5 million — and double that between spouses. These abatements would be forfeited if you set up a trust now and donated your assets to the entity.
“In addition, living trusts limit your beneficiaries who have to act within the laws of the trust. They might find themselves in financial trouble, forcing them to sell off trust assets for livelihood. In such a case, a mortis causa would be more useful, as it dissolves after certain objectives are met or after a certain time.”
Ultimately, says Slabbert, a trust should only be created with the help of an expert, for the specific benefit of your beneficiaries. If not, a trust can become a tax and financial burden on everyone involved.