INTER VIVOS TRUSTS IN THE RSA
INTRODUCTION
The term ‘inter vivos’ means amongst the living. So this is a Trust set up during one’s own lifetime as opposed to a testamentary trust set up in a Will, which only comes into being on death.
An inter vivos Trust is really a contractual arrangement whereby one or more persons give over assets to Trustees, to manage on their behalf for the benefit of third-parties (beneficiaries). Alternatively, the assets are vested in the beneficiaries and managed by Trustees on their behalf- the so-called ‘bewind’ trust.
Most such trusts can be categorised as discretionary or non-discretionary.
You generally have 3 parties:
- Donor/ settlor- generally a family relative or the estate planner client.
- Trustees- generally the client; his/her spouse & a third party (you are required to have at least one ‘independent’ person who is not related to the beneficiaries and three independents in the case of PBO trusts in terms of current practise).
- Beneficiaries- generally the clients’ children; grandchildren etc & him/herself. They are either vested with certain rights to trust capital and/or income, or not.
THE PROCESS
The written Trust Deed is signed by the Donor & Trustees & registered with the Master of the High Court having jurisdiction. An accountant (who must be a member of an accredited body) must file consent to act. The Master’s fee is only R 100; a new set of forms was introduced by Dept. Justice in 2013 for completion & filing. Letters of Authority are issued to the Trustees. Only then can the Trustees act on behalf of the Trust. The Trusteesshould then open a trust bank account and register the trust as a taxpayer.
Trustees must be chosen wisely as they can be held personally liable for breach of trust and contravention of any law.
A Trust can, in general, administer any type of asset located in SA. It can, depending on the powers given to the Trustees in the Deed, contract widely.
A Trust is treated as a seperate legal entity for tax purposes & asset registration purposes in South Africa & many other jurisdictions. This significantly advances their commercial viability. However it is not a legal person in the true sense.
ESTATE PLANNING AND OTHER ADVANTAGES
A Trust holds estate- planning benefits for wealthy clients. This is due, in part, to its asset protection potential. Assets held in Trust do not belong to a natural person and therefore do not fall into the estate. Rather, the planner either donates the asset or sells it on loan account to the Trust or the Trustees purchase the asset from the outset.
Therefore a Trust can also afford protection on divorce and insolvency of the planner for obvious reasons.
The planner can ‘peg’ the value of his/her assets by transferring assets to Trust or even ‘strip’ the value of his/her estate in this way. ‘Pegging’ would take place by lending assets to a Trust where effectively the lender’s wealth is pegged at the value at the time (& the growth takes place in the Trust) and ‘stripping’ wealth would happen by e.g. outright donation (giving away).
A natural person can only donate assets up to a max. of R 100 000 p.a. without attracting Donations Tax of 20%. This does however lend itself to ‘gifting’ as a strategy to minimise estate taxes and build family wealth.
Transferring assets on loan account to a Trust does not require one to charge interest, but if that asset generates taxable income the income can be deemed taxable in the lender’s hands. The same attribution rule can apply to a donor of trust assets as well.
Estate duty is charged at 20% on net assets on death in excess of R 3 500 000. Therefore it is attractive to wealthy clients to reduce their estate. A generation or more of further estate duty tax is also eliminated.
South Africa is about the only country in the world where you pay estate duty & capital gains tax on the same asset at the same time. It is therefore unsurprising that estate planning is so important.
A Trust can also protect minor & unsophisticated beneficiaries from themselves & unscrupulous third parties. The planner is also able, where appropriate, to access monies he/she has put in the Trust by taking a loan or redeeming a credit loan account. Giving monies directly to one’s children is not always wise! What if they get married in community of property or become insolvent?
For, inter alia, the above reasons long-term insurance policies can pay directly to a Trust if the policyholder nominates the Trust as beneficiary. Contrary to some belief, this does not exempt the proceeds from estate duty if the policy would normally have attracted duty. However the proceeds- whilst in the Trust- remain outside the beneficiaries personal estates and escape estate costs over future generations.
A Trust also holds certain advantages over usufructswhen it comes to Wills & estate planning. In particular, bequeathing ones estate to a Trust where the trustees are required to provide the surviving spouse with the net income may be preferable to bequeathing the estate to one’s children with a usufructfor the surviving spouse. For example the children may not be able or willing to care for the assets properly whilst professional trustees are obliged to do so & have the requisite knowledge.
A Trust can also offer an alternative in certain cases to the expensive & lengthy High Court process of appointing a curator ad litemand curator bonis to persons of unsound mind; prodigals or persons that require protection for one or another reason such as minors.
A Trust is a flexible vehicle, which can be amended (subject to the terms of the Deed & in particular the rights of capital beneficiaries) to suit changing circumstances. However it is very important not to treat the Trust as the alter ego of the planner as this can destroy the legal separation of the planner’s estate & the assets of the Trust.
It does not have to be audited, unless SARS specifically calls for it or the deed demands it.
The name of the Trust does not have to be reserved & does not need to contain the client’s name at all.
TAX
It is not tax effective for a Trust to hold cash or a ‘primary residence’ in every case, because of a relatively high income tax rate (40%),effective CGT (26.6%) and the absence of tax rebates. Rather hold tax-exempt or geared investments in Trust.
However a “special trust”- one that is either set up solely for disabled; mentally ill persons or minors related to the deceased in the case of a testamentary trust, is taxed at the same rates as natural persons but also without any of the rebates allowed to natural persons.
The ‘conduit’ principle currently allows income & capital gains to be taxed in the resident beneficiary’s hands instead of in the Trust, subject to attribution rules back to the donor if applicable. Tax losses are trapped in the Trust as one cannot employ the ‘conduit’ principle to pass them on.
The fact that Trusts pay the same rates of transfer duty on fixed property as individuals is a positive development.
CONCLUSION
This is a very brief summary of a complex field of law. There are a number of stipulations of, inter alia, the Trust Property Control Act (57 of 1988), Estate Duty Act, Income Tax Act, Companies Act, Close Corporations Act and Transfer Duties Act (e.g. sec. 9(1)(b)), VAT consequences and othersthat must be borne in mind before putting assets into Trust.
The body of jurisprudence on trusts has been bolstered by numerous High Court & Appeal Court cases in recent years.
DJ Thomson, CFP®
BA; LLB; Adv. PG Dip Fin Planning
this document contains information of general application only & is not advice.
01/10/2014