Trusts can serve two important functions; that is to protect assets as well as create certain tax benefits. Some examples are the following:
Firstly, in a case of insolvency, a beneficiary may enjoy protection against a creditor in a situation where an asset was transferred to a trust while the beneficiary was still solvent. It is then difficult for a creditor to set aside such a transaction. It is important to note that protection is afforded only to assets in which the insolvent beneficiary has no vested right.
Secondly, setting up a testamentary trust for the benefit of minor children creates income tax benefits and prevents funds from being held and administered by the Guardian’s Fund (Master of the High Court) on behalf of the minor child.
Thirdly, a trust can also act as a significant shelter against estate duty. Estate duty is payable on the estate of every person who dies and whose nett estate is in excess of R3, 5 million. It is charged at the rate of 20% and is collected by the South African Revenue Services (SARS). An individual can transfer assets with growth potential to a trust and then make their spouse and children the beneficiaries – the mechanism used to transfer the assets to the trust must be carefully considered. The growth in the assets from date of transfer to date of death will then accrue to the trust and any growth in the assets will take place in the trust.
The increase will not be in the individual’s estate and therefore the value of his estate will be considerably reduced and estate duty can be avoided for one or more generations. The above benefit is not applicable to vested or bewind trusts.
Income of a trust can be taxed in the hands of the donor, beneficiary or the trust depending on the circumstances. Where the trust itself is taxed, it is taxed at a flat rate of 41%. Special trusts are taxed at a sliding scale from 18% to 41% (same as natural persons).
The introduction of Capital Gains Tax (CGT) has seen the effectiveness of the use of trusts being somewhat challenged, however with proper in-depth planning the impact of CGT can be reduced. CGT forms part of income tax. A capital gain arises when you dispose of an asset on or after 1 October 2001 for proceeds that exceed the base cost of the asset – which is the amount against which any proceeds upon disposal are compared in order to determine whether a capital gain or loss has been realised.
Proposals have been made by the Davis Tax Committee in the past year regarding trusts which are inter alia as follows:
- The flat rate of taxation for a trust should remain at the existing level, currently 41%.
- Repeal the provisions of sections 7 and 25B of the Income Tax Act, which effectively renders the trust transparent for tax purposes.
- To tax trusts as separate taxpayers. The only relief to the rules should be for a “special trust” as defined in the Act.
- Remove spousal relief for estate duty and limit spousal relief for donations tax.
The Davis Tax Committee is not a law-making body, however it makes recommendations to treasury which are taken under serious consideration. What we can now watch closely for is a final report which changes the law and may affect trusts as a financial and estate planning tool.
 Contained in the Eighth Schedule to the Income Tax Act 58 of 1962
 Act No 58 of 1962
Contact your legal advisor for more information.
Refilwe Mphegor is currently an associate in the Tygervalley office of C&A Friedlander Inc.
Refilwe specialises in Trust and Estate Law.
This article is a general information sheet and 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. Errors and omissions excepted (E&OE)