Should we trust in trusts?

We live in uncertain times, so it is natural for many parents to want their children to have financial security, without money worries on top of everything else. Many parents also wish to build their wealth to such an extent that it will be passed down for generations to come, and a recent article published in Maya on Money examines the use of trusts to create intergenerational wealth and ensure a financial legacy.

No matter how much money you wish to leave for your offspring, here are eight basic points to consider if you’re thinking about setting up a trust.

  1. Due to the high investment tax paid by trusts, they are only efficient if you definitely intend to leave the assets in the trust for future generations. If you plan to sell the assets during your own lifetime, then setting up a trust isn’t necessarily the best move for you.
  2. There is no minimum amount to set up a trust, but it needs to be registered at the Masters’ Office in the region where the majority of assets will be held.
  3. A trust can be set up on death, so long as you make this provision in your will.
  4. It is only possible to donate ZAR100,000 a year to a trust without incurring donations tax.
  5. It is important to be adequately insured, and the proceeds of a life insurance policy can be paid to the Trust.
  6. It is also important to note that a South African Trust cannot hold offshore assets.
  7. A trust cannot own a tax-free savings account so these would have to remain separate to the trust.
  8. A trust must have an independent trustee – such as a trust company, auditor or lawyer – to deal with legal requirements and administration. This comes with additional costs to bear in mind.

A new section of the Taxation Laws Amendment Act, 2016 came into effect in March 2017, with the intention of preventing people from using trusts to avoid or reduce donations tax and estate duty.

In an article published on MoneyWeb, a certified financial planner clearly emphasises that “if a trust was created simply to save taxes, it may not serve that purpose any longer. Depending on the reasons for establishing a trust and the value it offers, it may be worthwhile considering more cost- and tax-effective alternatives to hold your shares or any other asset(s) in a trust.”

It is important to understand the consequences of these tax changes if you have an existing trust, and to be aware of the implications of new trust structures if you’re considering whether it is the appropriate choice for you.

Posted in Blog, financial planning.