Trusts have helped structure estates in the past, and will continue to do so in the future
Published: January 2017
Trusts, and specifically discretionary trusts or family trusts, have historically been used as an estate planning tool. They have provided individuals with an opportunity to 'freeze' their estates, for the purpose of estate duty, during their lifetime by selling growth assets to a trust. The assets are replaced in the estate of the founder by the loan account, while all future growth happens in the trust. In a discretionary trust beneficiaries are not entitled to the assets or income of the trust. This means a beneficiary's creditors cannot attach the trust's assets if any beneficiary is declared insolvent, and the trust assets will not form part of the founder's estate when he/she dies.
The current tax regime allows the flow of income and capital gains generated in the trust to beneficiaries, thereby providing a means of tax planning. If the Davis Tax Committee (DTC) recommendations are implemented, this will no longer be possible. However, this does not mean that trusts are no longer an important tool in an estate planning exercise.
DTC recommendations in relation to the taxation of trusts
We must emphasise that these are only recommendations and not official policy. National Treasury will consider the recommendations and if it finds them acceptable, they will be adopted into the normal budget and legislative processes that enable further public comment. However, National Treasury has so far opted not to follow the DTC recommendations on interest-free loans to South African trusts and accordingly a new section 7C in the Income Tax Act (likely to take effect from 1 March 2017) has been introduced. This is focused on interest-free loans to trusts that has been addressed in the Draft Taxation Law Amendment Bill of 2016.
Other recommendations in the DTC report include:
Given the extent of the proposed changes, what is the future of the family trust?
From the above it is clear that the DTC is suggesting both a limitation of the perceived tax benefits associated with trusts and, importantly, an increase in the administration and reporting relating to trusts. However, the nature and extent of the other DTC recommendations give rise to the question: is there still a purpose for establishing a family trust?
Family trusts are flexible and versatile structures and offer many benefits beyond tax
Family trusts are seldom established purely for tax benefits, and other purposes typically include:
Where trusts have been set up for these purposes, the intention and benefit of a trust remains valid and appropriate.
Trusts will be under the spotlight to ensure that there is no tax abuse
The DTC has recommended that, in addition to the proposals by the DTC, there should be a review of trusts against existing tax returns submitted to SARS. The DTC has drawn attention to the fact that the records of the various offices of the Master of the High Court indicate some 333 465 active trusts, whereas only 100 590 income tax returns were submitted for trusts. There are further discrepancies, such as 208 trusts that pay salaries that cannot be matched to an employee number. In a financial climate where National Treasury is looking for ways to reduce the budget shortfall it appears that existing trusts are being analysed for non-compliance with existing tax laws.
If you have a family trust, you may need advice to ensure that it is future proof
To give effect to the review recommendation SARS will need to implement new systems. Implementing this recommendation will place great scrutiny on the management and administration of trust arrangements, making a legitimate trust arrangement even more important (such as having a truly independent trustee, and ensuring that there isn't any abuse of the trust, that the trust doesn't function as an alter ego of the founder and that there is good governance). There can be no doubt that loose trustee arrangements are unlikely to withstand scrutiny, and it is advisable to start taking proactive steps (such as a trust audit) to ensure that existing trusts are future proof. The importance of a truly independent trustee who understands good governance and the way a proper trust arrangement should operate is of greater importance now than ever before.
Family trusts could arguably be even more important for estates worth over R15 million
Considering the recommended removal of spousal rollover relief [section 4(q)] as well as the portability of the unutilised portion of the abatement of the first deceased spouse (section 4A) to the surviving spouse (with an increased threshold to R15 million), the DTC recommendations would make trusts unnecessary for estate planning for the middle class (thereby reducing the administrative burden since estate duty isn't an issue below R15 million). However, it could also be argued that trusts are about to become even more relevant for wealthy individuals whose estates exceed R15 million. This is because there is potential for duplication of estate duty when the first dying's assets are bequeathed to a surviving spouse, which would be avoided if the same estate was bequeathed to a trust where the beneficiaries include the surviving spouse and the next generation. Section 7C relates to a mechanism to encourage loans to trusts to carry at least the official rate of interest will not be applicable in testamentary arrangements of this nature as there won't be outstanding loans.
The proposals simply highlight the need for ongoing estate planning and management
Once again, it must be stressed that these are only recommendations and, in the absence of draft legislation and/or budgetary proposals to change the status quo, it is not advisable to make decisions (such as whether to terminate the trust) that alter current planning. However, it is important to keep abreast of developments. There will still be a future for family trusts, but these are likely to be useful only for wealthier clients with assets of more than R15 million (unless special circumstances apply), but more formal management and administration will need to be in place.
Please speak to your regional fiduciary specialist about how we can help you if you have any questions about an existing family trust, or if you think you may benefit from establishing one.
DISCLAIMER The Fiduciary Focus Newsletter is intended for general information purposes only and should not be construed as tax, legal or accounting advice. This communication is based on our bona fide interpretation of legislation, rules, regulations and publications. Nedbank Private Wealth provides estate and tax planning advice; however, we do not provide tax, legal or accounting advice and you are requested to consult a professional tax advisor or professional in this regard.
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