Due to the complexity and confusion with the creation of Trusts, we are going to discuss the various aspects thereof, in an effort to assist the public and to clearly indicate the advantages and benefits of a Trust.
There are a number of advantages to placing assets in a trust for estate planning purposes. These advantages include:
- SAVING ON ESTATE DUTY
The growth on assets, such as shares, transferred to a trust is not subject to estate duty, because the growth belongs to the trust. If you have made use of a loan to the trust, the value of the assets as at the date of transfer remains an asset of your estate because of the loan account in your estate. - A TRUST DOES NOT DIE
This means that a trust is not liable for estate duty, other taxes or costs, such as transfer duty, executor’s fees, or conveyance fees, that would be payable in the hands of your estate or heirs. Also, the trust does not pay CGT as long as an asset is not sold. - FIXING VALUE
The value of any assets transferred to a trust is effectively frozen for estate duty purposes. - TRUSTS CONTINUE to pay benefits to dependants (beneficiaries) after you die. On the other hand, assets in your estate may not be freely available to your dependants, because your estate is frozen during the winding up process. This may result in your dependants not receiving an income until after your estate is finalised.
- PROTECTION OF ASSETS
A beneficiary cannot sell a right in a trust (unlike shares in a company). If a beneficiary becomes insolvent, the assets in the trust continue to be protected (unlike shares in a company). Likewise, if you, as the donor, or the trustees become insolvent, the trust’s assets remain protected.
TAX-EFFICIENT INCOME SPLITTING
Income from a trust can be structured in a number of ways to provide tax efficiency. For example, R100 000 earned by a trust can be split between five beneficiaries so they earn
R20 000 each. Assuming they earn no other income, they would pay no tax as this amount is below the tax threshold.
ASSET PROTECTION
The term “asset protection” is commonly misunderstood. Many believe that it refers to the techniques used to shield a debtor’s assets from creditors’ claims. Because it is impossible to “bulletproof” a debtor, asset protection involves structures and techniques that make it more difficult and expensive for a creditor to reach a debtor’s assets. The objective is to change the creditor’s economic analysis, making the pursuit so difficult and expensive, the creditor will either give up or be willing to negotiate on terms more favourable to the debtor.
Asset protection does not deal with secrecy or hiding assets. Hiding assets is an ineffective means of shielding them from creditors because a debtor would usually have to disclose his assets in a debtor exam, under penalty of perjury. A properly structured asset protection plan allows the debtor to reveal the nature and the structure of the plan without sacrificing its efficacy. The general proposition underlying asset protection is that a creditor can reach any asset owned by a debtor, but cannot reach assets not owned by the debtor. Consequently, the focus of all asset protection planning is to remove the debtor from legal ownership of assets, while retaining the debtor’s control over and beneficial enjoyment of the assets.
Asset protection that works must be very practical. The planning is done within a statutory framework, but it is the practical implications of the planning that shape the exact nature of the structures and techniques. For example, a creditor may be able to make a successful legal argument that a given structure should not stand, and thus be able to retrieve the debtor’s assets. But, if making such an argument will be sufficiently expensive and time consuming, the creditor may never make it. Practitioners must take into account both the substantive legal issues and the practical aspects of a plan. This article will focus on the more practical aspects and results of asset protection planning, touching on the underlying substantive law only in passing.
Several different factors determine the nature and the type of planning that should be used for a given client. The three most important factors are:
- the identity of the creditor pursuing the client,
- the nature of the assets that will be pursued by the creditor, and
- the extent to which the debtor is willing to go to protect his assets.
The identity of the creditor refers to how aggressively the creditor will pursue the debtor’s assets, and how knowledgeable the creditor is about debt collection laws. The more aggressive and knowledgeable the creditor, the more obstacles we need to erect in his path. The nature of the assets refers to the specific assets owned by the debtor. There is no “magic bullet” asset protection strategy; different structures are used to protect different types of assets.
The extent to which the debtor is willing to pursue asset protection is important in determining the appropriate strategy. Some debtors may be willing to do nothing more than shuffle paper agreements, whereas others may be willing to go through a divorce, move assets offshore or sell their home.
Practice Pointer: All asset protection planning implicates income, transfer and property tax issues, and fraudulent transfer laws. While a discussion of these issues is beyond the scope of this article, it should be noted that many debtors approach the fraudulent transfer analysis from a very practical perspective, as follows:
Assume the debtor is facing a significant lawsuit risk with a large anticipated judgment. The debtor has two asset protection choices: (i) do nothing and stand to lose all assets when the plaintiff becomes a creditor, or (ii) engage in some asset protection planning. Because the common downside of a fraudulent transfer is the creditor’s ability to set aside the transfer, a debtor may have nothing to lose (other than the transaction costs) by engaging in planning that may (or may not) be deemed a fraudulent transfer. From a creditor’s perspective, a successful fraudulent transfer challenge gives the creditor the legal right to pursue the transferred assets. Having a legal right to do something does not mean having the actual ability to do so, and does not mean that the pursuit of the transferred assets would be cost effective.
WVA – Wietz Viljoen
This article is for general information purposes and is aimed at advising the public. It should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.
