Family Trust Registration
A trust that comes into being through an agreement between the founder and the trustees. Assets are sold to the trust and a loan account (debt) is created, or assets can be donated, but with donation tax implications. The trust may obtain other assets by way of purchasing or an inheritance.
Firstly many people are under the impression that one needs to be wealthy to set up a trust, nothing could be further from the truth, in fact the less you have the more you need a trust, the wealthy will do just fine if they face a financial crisis, us lesser mortals will lose everything if we do not protect it.
A further common myth that pervades, being that the Government is looking at trusts. Trusts were previously not defined in the Income Tax Act as taxpayers, this clearly gave rise to serious abuse of trusts for tax purposes. The Government has since 1991 made various amendments to the act to combat these practises. Since 2002 there have been very few amendments, so we can safely assume that there is a degree of stability in that area. Further, the manner in which we will advise that you use your trusts, and the way they hold assets and trade, are securely within in the ambit of all existing laws and specifically the Income Tax Act.
Duties of a Trustee
The most important duties and functions of a Trustee are the following:
At all times to act in the best interest of the the Trust;
To have regular Trust meetings
To keep records of all meetings and the Trust Records
To keep Financial records
To submit returns to the receiver of revenue
What is a trust is and why the benefits cannot be ignored
Briefly touching on a few perceived disadvantages.
There is the big transfer duty debate, transfer duty is higher in a trust as the transfer duty is levied at a flat rate of 10 %, however this is not an additional fee when buying in a new development as it already includes 14% VAT. The cost of the duty is further skewed, when one acquires property at the lower end of the market, as there is a sliding scale that applies to natural persons. The initial extra cost, is well worth paying as will become evident when we address asset protection and death costs and taxes.
Control: legally and technically, once a trust is formed, the assets that are held in trust are separate from the individual. The control of the assets are now no longer in the hands of the individual, however the trustees are still in control as they are still trustees of the trust and privy to all decisions,
Set up costs: there are clearly going to be legal fees incurred in the establishment of your trusts, be advised that you should utilise the services of an expert as we often come across poorly drawn deeds, or deeds that do not give you all of the benefits we discuss here.
Administration: a trust needs to be administered, the Trust Property Control Act, requires that a simple set of financials be drawn, please take note that it is not mandatory that the financials be audited, as this will result in unnecessary further costs, so simple financials will suffice which are not costly.
The high tax rate opinion: trusts are the most highly taxed entities or person in South Africa, they are taxed a rate of 40%, however there are mechanisms to minimise tax payable through the use of a trust, paradoxically, through the conduit principle, tax efficiencies can be achieved and the Trust is actually an entity which will make provision for tax savings, which you can not personally or through a Company achieve. So whether you have an income tax or capital gain, in the Trust the taxation can be minimized.
The concept of a trust and the benefits of a trust.
A trust is a separate entity from an individual, totally distinct as one person from another, however not unlike a CC or PTY LTD but quite unique, in that it is not a creature of statute, but it is the product of a contractual arrangement. The Income tax act, deeds registry act, transfer duty act, Value added Tax Act and the Insolvency act afford a trust legal personality.
We can contrast a Trust with a CC or a Pty Ltd which are entities created by completing and registering certain statutory forms with the Registrar of Companies which then registers the CC or Pty Ltd and it comes into being. A Trust is created by contract which is a Legal document, commonly referred to as a Trust Deed. The following points are important to remember, a Trust while not legally being referred to as a person is separate from you, a trust is not owned by any one, and a trust never dies or terminates unless it is terminated by agreement or it is sequestrated if it is unable to pay its debts. The latter qualities make a Trust the only entity which will afford total asset protection and estate duty savings along with a myriad of other benefits, which we will discuss shortly.
There are various types of trusts, namely;
Vesting or Bewind Trusts,
Special Trusts and
Discretionary Trusts, we will only be discussing Discretionary trusts as, the other forms of trust are of no benefit to us as they do not afford the necessary asset protection and estate duty savings and Capital tax saving benefits that discretionary trusts are able to offer.
A trust is such a wonderful tool in that it is not owned by anyone, it does not die and it is totally separate from the persons who have formed it and or control and benefit from it. These qualities have no match as you will soon discover, and which we will point out.