Locally, as trust compliance becomes more complex and trusts become more costly to administer, their value is increasingly being questioned. However, a trust’s worth extends beyond its financial benefits, and as such, they are still very relevant tools to use in a well-crafted estate plan, especially for high-net-worth families.
Seugnet Moggee, Fiduciary Partner at Citadel, explains how people can make trusts work for them despite the latest developments in trust legislation following South Africa’s greylisting by the Financial Action Task Force (FATF) earlier this year.
NEVER ONLY A TAX CONSIDERATION
“In the past, trusts were not even subject to tax. However, this has not been the case for a long time and with the increased development of and focus on the laws around the taxation of trusts, any planner who established a trust purely for tax benefits is going to be sorely disappointed. Here are a few examples of how laws have changed, and it is important that you talk to your fiduciary specialist about all the current laws that impact trusts,” says Moggee.
In the area of taxation on trusts, we saw a few important developments in the addition of section 7C to the Income Tax Act. This has created tax implications for funding trusts through low-interest or no-interest loans.
“While there are still benefits to establishing a trust for the benefit of your family’s estate and legacy planning purposes, they are more complex to administer than they used to be,” explains Moggee.
More recently, changes to the Financial Intelligence Centre Act and the Trust Property Control Act have impacted on the complexity of administering a trust, which will likely impact on the costs. Leading up to South Africa’s greylisting by the FATF in February 2023, the South African government amended various laws which impacts trusts. Due to the FATF’s mandate of curbing money laundering and the proliferation of terrorist financing, the new laws, amongst other amendments, require full disclosure to the Master of the High Court of the trust’s beneficial owners, which includes the donor, trustees and named beneficiaries. This added administrative burden may make the running of trusts more expensive as service providers charge for this additional compliance.
SEVEN WAYS TO MAKE TRUSTS WORK FOR YOU
“Despite these regulatory changes, trusts remain a valuable estate and legacy planning tool, especially for families concerned with generational wealth. This is because trusts offer numerous asset protection capabilities for families,” says Moggee, who outlines seven benefits below.
- PROTECTION AGAINST LOSS OF CAPACITY
With people living longer, trusts are valuable tools in instances where an individual may lose their capacity to act, for instance if dementia or any illness hinders them from managing their own financial affairs. Trusts ensure that not only are the planner’s interests looked after, but also that all beneficiaries are cared for if the person responsible for handling the family finances is no longer able to.
- PROTECTION OF MINORS
Trusts are encouraged for parents with children or grandparents with grandchildren under the age of 18 who are not able to inherit. Upon the death of the parents, a testamentary trust will be formed where the nominated trustees will take control of the assets in the best interest of the children until they reach a specific age, as decided by the parent.
- ESTATE AND LEGACY PLANNING
Assets in a trust are not subject to the estate administration process as they do not belong to an individual, so heirs and beneficiaries can get access to funds without the delays associated with the winding up of estates.
Trusts offer flexibility on how assets are used to meet the unique needs of the beneficiaries.
- PROTECTION OF ASSETS FROM CREDITORS
Assets in a trust are protected from any claims by creditors or legal claims, meaning that family wealth can be protected. Note that loan account claims or awards that have been vested in beneficiaries are assets in the hands of the individual and could be attached.
Once lodged with the Master of the High Court, a will becomes a matter of public record, whereas assets in a trust remain private and no-one, except interested parties such as the trustees and beneficiaries have access to details of its value.
Trusts allow assets to be managed in a consistent and ongoing manner. Unlike offshore, where trusts cannot exist in perpetuity, in theory there is no time limit to trusts in South Africa. They can continue to operate indefinitely if there are assets and beneficiaries.
REVIEW YOUR TRUST IF YOU HAVE A GLOBAL FAMILY
When the beneficiaries of a trust emigrate and change their tax residency, there are various implications for the trust, and it is essential to obtain appropriate, qualified advice if this is the situation in your family. Depending on where the beneficiaries emigrate to, they may need to be removed as beneficiaries entirely.
SEEK PROFESSIONAL ADVICE
“Remember, trusts are tools that are used to mitigate risk to an individual’s and their family’s generational wealth. They are not tax tools. It is essential that families seek professional advice before setting up a trust, because not only are they complex, but mistakes can have negative implications for loved ones and may even carry severe legal consequences for non-compliance,” concludes Moggee.