Benefits of Having a Trust

Some of the benefits of placing assets in a trust are for expample: potential estate duty benefits *this is the tax you might pay if your estate is over R3500 000.00) as well as the future protection of assets from Creditors etc.

"How do I move assets to a trust and will it immediately be shielded from Creditors?" 

If the asset/s are currently in your personal name you will have to sell it to the trust and simultaneously have a loan agreement done as you will be lending the money to the trust to fund the sale.  This will be recorded as a book entry sale.  Should you not record this as a sale it could pose a problem as it will be regarded as a donation and donations tax could be applicable at 20% of the value of the asset.  Currently you are allowed to donate a R100 000 per annum which is free from donations tax.

Once you have sold the assets to the trust the trust will not pay you but a loan account will be created in your favour.  This loan account is however still seen as an asset in the transferor's personal estate.  Whilst a trust offers protection against creditors, it is important to note that whilst there are loans or claims against the trust by the transferor, the trust could be exposed to creditors of that person/transferor.  It is therefore important to reducte the value of the loan account ot nil as soon as practically possible.

There are three main ways of reducing such a loan account:

1. Donations

Both husband and wife may donate R100 000 each year to the Trust  This donation has to be an actual donation i.e. the money must be deposited in the Trust's bank acount if it is not to attract capital gains tax.

2. Rentals

Another form of reducing the loan account is via rentals.  The assets in the trust could be rented to oneself and or one's family at the depreciation cost as well as the upkeep costs of the assets.  If the rentals always equal the depreciation cost of the assets there will be no income tax impliacations.  The rental is not an amount that physically needs to be paid by the trust.  Since the trust is now owed rent and in turn still has outstanding debt in the form of the loan account, the two debits may simply be offset against one another - the net effect being to reduce the loan account.  Once again it is not appropriate to set the rental at unrealistic levels and the rental should be in line with the going rate in the area and for that type of asset.

3. Drawings

The trust may have investments such as shares, endowments and unit trusts.  When you need money for yourself and your family (education, holidays etc) you can draw the money from the Trust and in this process reduce/recall your loan account.

Future money and profits from business shares or properties held in the Trust will also flow directly in the Trust without increasing your loan account and drawings against this money will further reduce your loan account

Taken from In Focus Magazine, Dainfern September 2013

Questions can be emailed to chrisna@richattorneys.co.za