All Trusts are registered through the Master of the High Court from various jurisdictions. Trust Deeds determine the administration and rules for the running of the Trust. Not just a powerful tool, to safeguard assets (property, investment property, homes, furniture, jewellery, vehicles, investments, etc.) for future generations, but also for estate planning.
Three types of Trusts:
Family Trust (also known as Inter-vivos)
- The most common Trust.
- Tax rate of 45%.
- Can trade and also earn rental income, dividends, interest.
- Can register for VAT & PAYE.
- Can hold various assets.
- Will be discussed in more detail below.
- Gets registered, because a deceased person’s testament requires it.
- Must be specifically mentioned in the Will & Testament.
- Powerful tool to protect the interests of minors after your passing.
- Gets terminated after the beneficiary(ies) reach a certain age.
- Not setting one can cause assets to be managed by the state.
- Guardian funds usually invest at below-market rates.
- Also known as “Curatorship Trust”.
- Trustees administers the funds and assets on behalf of a beneficiary who is unable.
- Beneficiaries usually suffer from a disability: physically and/or mentally.
- Special Trust A: beneficiaries with disabilities and
- Special Trust B: for relatives.
Taxation works on the same scale used for individuals.
More about Family Trusts
These Trusts can be seen extension of oneself. Income received by the Trust can be distributed to the beneficiaries and the income retains its nature. Interest received by the Trust can be distributed to the beneficiaries and the beneficiaries declare the interest. The beneficiary (as a natural person under 65 years of age) still gets the tax rebate of R23,800 (2020) on the interest distribution.
Dividends are not taxed, on distribution to a beneficiary, as withholding tax was deducted, when the dividend was declared.
Rental and/or Trading PROFIT, can be distributed, to beneficiaries (who have rights to the income). This distribution is deducted, in full, from the Trust’s taxable income, BUT it retains its nature within the beneficiary’s hands.
This means that should rental income be distributed, the beneficiary has to declare this distribution, as rental profit in their tax return.
Capital Gains can also be distributed, however, the capital gain will be taxed, in the 1st degree of distribution.
This means that if there is a gain – being distributed -, the 1st beneficiary(ies) who receives it, must declare the capital gain. This applies where a trust is a beneficiary of another trust.
- Trust 1 = Distributing trust with a capital gain.
- Trust 2 = Beneficiary of Trust 1.
- Trust 2 has natural persons as beneficiaries.
The gain has to be taxed in the Trust 2, even if Trust 2 distributes it its own beneficiaries. Capital gains can occur on: sale of investments or the sale of rental properties and even on the write-off of inter-group loans.
Distributions out of a Trust are:
- Deducted from the Trust’s taxable income – meaning it can reduce the tax paid by the Trust.
- Can be distributed to various individuals / Companies / other Trusts
The question now is, how do we get assets into the Trust?
There are several ways and each has a draw-back. Firstly, note that: the first R100,000 (per tax year) an individual contributes or donates to the trust is exempt from donations tax. Donation’s tax bears a rate of 20% up to R30million, thereafter the rate is 25%. After certain exemptions is taken into account.
So, bearing the above in mind:
The trust can obtain bonds and loans
The trustees’ affordability will be taken into account. The Trust will be liable and no donation tax will apply. Should the Trust be unable to honour the payment agreement, the Trustees could become liable.
Loan assets to the trust
- Instead of the Trust owing the bank, the Trust owes the Trustees.
- The loan should bear interest (Or SARS will penalise and raise the interest on your behalf).
- The interest is taxed as interest received, in the Trustee’s personal capacity.
- The Trustees give up ownership and rights to the assets. A big problem comes in should the Trustee pass away and the loan not be paid up: The loan becomes payable to Trustee’s estate. This can potentially wipe out the Trust’s whole asset base.
Trustees donate or contribute to the Trust’s capital
This is where the donations tax and the R100,000 exemption comes in. Should the Trustee(s) decide to transfer an asset (property or monies) into the Trust, the first R100,000 (per tax year) will be exempt from tax and the balance will subject to donation tax.
A jointly owned property’s cost is divided and the exemption applied separately. The book entry is simply: DT asset (property or bank); CT Trust capital. The Trust can utilise bank monies for investments.
Regarding properties in a Trust
A property within a Trust – whether transferred to the Trust or bought by the Trust – does not benefit from the lifetime exemption of R2,000,000 when sold. The R2,000,000 only applies to a primary residence, registered to a natural individual or individuals. Even if you live in the property, registered in a Trust, which is your primary residence, the exemption would not apply.
This means, that, should the property be sold, capital gain rules will apply – whether the beneficiaries stayed in the property or whether for rental purposes.”
Some administrative and legal info:
When registering a Trust the following is needed:
- Original trust deed.
- Original or originally-certified J401: with all sections completed.
- Originally-certified ID copies of all Trustees.
- Proof of address
- Original or originally-certified J417: Acceptance of Trusteeship.
- Proof of payment made to the Master.
- Beneficiary declaration forms and originally-certified identification.
NOTE: FROM EXPERIENCE WE ADVISE YOU MAKE COPIES OF THE DOCUMENTS AND HAVE THEM CERTIFIED BEFORE SENDING THEM OFF AS “BACK-UP” IN CASE THEY ARE LOST.
Always keep the original Letter of Authority and Trust Deed safe. You will NOT be able to amend Trustees without these or at least originally certified copies and affidavit stating that it is lost. Copies can be requested, at a fee, from the relevant Master’s Office.
– Salim Khan