Asset protection is the name of the game when it comes to trusts. That’s my view, at least. In the past year or so, the tax authorities have indicated that the ‘conduit principle’, whereby income can be channelled to beneficiaries, who then pay the tax thereon, will be changed – and trust income will be taxed at a flat rate.
So far, however, the law has not been introduced. It’s anyone’s guess whether it will ever materialise. Here are some certainties about trusts I can share with you:
- Tax authorities in one country can interfere in the tax affairs of taxpayers in another country only under exceptional circumstances, which is why the offshore trust structure is still a favourite with me.
- The tax landscape in South Africa changes constantly.
- No one can pay income tax on income that has not been earned.
Actually, this last point is not altogether true. The deeming provisions in the Income Tax Act can, in fact, lead taxpayers to incur a tax liability in instances where they earned no income. This is iniquitous, but does not affect the suggestions that follow. Not all tax advisors are equally enthusiastic about the tax savings possible with local trusts.
But as long as the trustees meet regularly and all have a say in the administration of a trust, it is an excellent asset protection vehicle.Naturally, one should not, as a trustee, give any guarantees that involve trust assets. If these are used to secure loans, then of course the protection is gone, at least as far as the lender is concerned.
How to ensure peace of mind
Assets that are in a discretionary trust and correctly administered are not part of the estates of the parties to the trust. A financial setback for any trustee or beneficiary does not affect the trust, unless some other factor, such as a guarantee of a loan, is present. Non-income producing assets, such as valuable art in the family home, a collection of classic vehicles, antique furniture or even expensive pets, are the type of assets that can appreciate in value in a family trust and are exempt from tax under the capital gains tax rules.
Thus, a trust of this nature can give you great peace of mind, as you will know that the most precious heirlooms of the family are safe from creditors of the family business, should things go wrong.
Certain financial assets can also be safely stored in the trust to bolster financial resources in time of need. The endowment policies that life insurers offer will pay out tax-free money to the owner at maturity. Donations taxes are levied only in cases of donations per annum in excess of R100 000, so such a donation could be made to a trust endowment annually.
It is not particularly easy to plan one’s tax affairs in South Africa, but there are still opportunities for building a nest egg without too much interference from SARS. The family trust, kept simple and administered properly, is one of them.
Peter O’Halloran is an advocate in private practice. Phone him on 00267 390 2779