Trusts as a tax planning tool
Trusts have largely fallen out of favour as a tax planning tool, because of various anti-avoidance provisions that SARS have introduced over the last couple of years.
Despite this fact, there is still a solid business case for establishing a Trust in South Africa, if your personal circumstances fit the profile explained below.
The primary tax planning benefits of establishing a Trust are as follows:
- Long terms savings in Estate duty;
- The ability to use the multiple exemptions of taxpayers, and taxpayers with lower marginal tax rates;
Let’s address the first point above.
Estate duty is leviable at a rate of 20% on the value of a deceased person’s estate to the extent that, that individual’s estate is greater than R3.5m.
The central idea behind using a Trust as a tax planning tool is that you transfer your assets as early as possible into a Trust. By doing this you essentially peg the value of the asset on that date (as the loan account in your name with the Trust), and then the growth in the underlying asset subsequent to that date accrues to the Trust.
Given that the Trust is a separate entity apart from the taxpayer when the taxpayer passes away, the assets that were sold to the Trust, don’t get included in the taxpayer’s hands but in the hands of
the Trust.
For this reason, Trusts are generally seen as a tax planning tool for high net worth individuals, because the ultimate tax saving here is estate duty, and as long as you don’t foresee your estate being worth more than R3.5m, there would be no reason for you to set up a Trust.
As a married couple, you could even double that threshold to R7m, by registering assets separately in each spouses’ hands. If you do foresee, that in the long term your estate will be greater than R3.5m (or R7m as a couple), and you have dependents that you would like to bequeath assets to overtime, then you should seriously look at establishing a Trust.
The final benefit relates to income tax savings. Once assets have been transferred to a Trust the taxpayer can distribute income earned on the assets in the Trust to the beneficiaries. The tax benefit comes in, in that the taxpayer can reduce his overall “family’s” tax rate, by making use of the multiple exemptions applicable to each beneficiary, and the lower tax rates of beneficiaries.
118Accounting have many years of experience in implementing Trust structures for our clients. If you would like to discuss how we could do that for you, then contact us on:
• admin@118acccounting.co.za;
• 0824106818