Trusts may be one way to pro­tect your as­sets from cred­i­tors, but they are not some­thing you should en­ter into lightly be­cause the neg­a­tives could out­weigh the pos­i­tives of pro­tec­tion, writes Maya Fisher-French

CityPress - - Business -

When does a trust make sense? Mpho wrote to City Press to ar­gue the point that a trust would have been able to pro­tect his as­sets when he re­cently landed in fi­nan­cial and le­gal dif­fi­culty af­ter sign­ing surety on credit for a busi­ness. ‘If my as­sets were owned by a trust, I would have been able to pro­tect them,’ he wrote. Un­for­tu­nately, it is not as sim­ple as that. There are many points to con­sider. Here are a few:

Con­trol of your as­sets

Frank Mag­wegwe, head of per­sonal ad­viser ser­vices at Mo­men­tum Retail, says one of the key fea­tures of a trust is that you no longer own the as­sets. They are owned by the trust, which is a le­gal en­tity that is gov­erned by a trust deed and which is re­quired to have in­de­pen­dent trustees, whose re­spon­si­bil­ity it is to carry out the man­date of the trust.

This is a le­gal re­quire­ment to en­sure that you do not have un­nec­es­sary in­flu­ence over the as­sets. All de­ci­sions made within the trust would have to be signed off by in­de­pen­dent trustees, who have a fidu­ciary re­spon­si­bil­ity to ad­here to the man­date.

“It is ad­vis­able to have at least three trustees, with one of the trustees be­ing an in­de­pen­dent trustee, who is usu­ally some­one like an at­tor­ney or ac­coun­tant,” says Mag­wegwe.

If you no longer wish to house the as­sets in the trust, you have to fol­low a le­gal pro­ce­dure to un­wind the trust.

In Mpho’s case, for ex­am­ple, the bank may not have granted the busi­ness a loan if Mpho did not have as­sets in his own name to use as surety. If the bank was pre­pared to lend the busi­ness money with­out surety, Mpho could have taken the loan in the com­pany’s name and pro­tected his as­sets in that man­ner.

Higher tax rates Trusts are taxed at a flat rate of 41%, so you could be pay­ing more tax than you would in your in­di­vid­ual ca­pac­ity. Cap­i­tal gains tax is charged at a max­i­mum ef­fec­tive rate of 27.31% com­pared with 13.65% for in­di­vid­u­als, again in­creas­ing the tax li­a­bil­ity. In the case of res­i­den­tial prop­erty, if the house is in the name of a trust, it does not qual­ify for the R2 mil­lion cap­i­tal gains tax ex­emp­tion.

Do­na­tions tax

The man­ner in which as­sets are trans­ferred is im­por­tant and rel­e­vant to the ex­tent of the pro­tec­tion of the as­sets. You can­not just trans­fer as­sets to a trust be­cause this would be seen as do­nat­ing your as­sets, and do­na­tions tax would ap­ply for any value of more than R100 000 a year.

The trans­fer of as­sets usu­ally takes the form of a loan, which is re­ally a pa­per trail rather than an ac­tual loan. The trust is granted a “loan” by the founder of the trust equal to the value of the as­sets. The trust buys the as­sets us­ing the loan and the founder writes off the loan each year by R100 000 to avoid do­na­tions tax. If the founder dies be­fore the loan is re­paid by the trust, the “un­paid” as­sets within the trust would form part of the founder’s es­tate.

When pro­tec­tion doesn’t ap­ply

While a trust can pro­tect your as­sets from cred­i­tors, this pro­tec­tion does not ap­ply if you trans­fer the as­sets to prej­u­dice cred­i­tors.

David Knott, a nonex­ec­u­tive di­rec­tor of Pri­vate Client Hold­ings, says that once an as­set has been pledged as surety, it can­not later be placed in a trust be­cause that sub­se­quent dis­posal would be set aside by the court. “Like­wise, should you be on the brink of in­sol­vency, you can­not seek to pro­tect as­sets by plac­ing them in trust as any trans­ac­tion that oc­curs within two years of se­ques­tra­tion would be set aside,” says Knott, who adds that you can­not move as­sets into a trust prior to di­vorce to hope to hide as­sets – the court would look into the mo­tive be­hind the trans­ac­tion.

Ad­min­is­tra­tion costs

There are costs to both set­ting up a trust and main­tain­ing it. You can ex­pect to pay be­tween R7 000 and R12 000 to es­tab­lish a trust. The an­nual fees would vary, de­pend­ing on the un­der­ly­ing as­sets.

For ex­am­ple, if the trust just held a fixed prop­erty, the an­nual trust ad­min­is­tra­tion fee would be in the re­gion of R12 000, while a share port­fo­lio could cost 1% to 2% of the value un­der man­age­ment. The trust has to keep ac­cu­rate an­nual fi­nan­cial state­ments and sup­ply an an­nual and pro­vi­sional in­come tax re­turn. A sep­a­rate bank ac­count has to be main­tained and trustees’ min­utes and res­o­lu­tions about all trans­ac­tions have to be drafted and re­tained. Th­ese would lead to ad­di­tional costs.

“Fees vary greatly, de­pend­ing on what is re­quired, and the client should ob­tain quotes be­fore pro­ceed­ing,” says Knott, who adds that a trust should be con­sid­ered when you are likely to hold growth as­sets over a pe­riod of time and you are look­ing for an or­derly ve­hi­cle to pro­tect ben­e­fi­cia­ries against them­selves, a fu­ture spouse and pos­si­ble cred­i­tors.

“While there may be the like­li­hood of sav­ing es­tate duty upon death, the de­ci­sion to cre­ate a trust should not be driven by this or any other tax con­sid­er­a­tion,” he says.

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