Trust to pass on farm?

There are many factors to consider when thinking of ways to secure an asset for future generations. PRIVATE COMPANY VS A TESTAMENTARY TRUST

Question: I’d like to transfer my farm into a vehicle to preserve it for my children. With recent tax changes, I’m told trusts are tax unfriendly, and I should rather transfer it into a private company. Others say I should have it transfered into a testamentary trust on my death. What’s the best vehicle?

Jesse Morgans of Asset Protection International answers:

When using trusts from an estate-planning perspective, there are many factors that affect one’s decision. Consult with an independent financial advisor or trust specialist who can do a full fact-finding and needs analysis to give you comprehensive advice that’s specific and tailored to your needs.

Your requirements as you describe them lend themselves to the use of a trust.

Importantly, the structure must separate the asset (the farm) from the entity that derives an income from it, in this case a business that can take several forms.

If the farm receives rental income from a business, none of the business’ liabilities should place the farm in jeopardy.

The SA trust environment’s become less friendly regarding tax, but the conduit principle in the Income Tax Act still applies. It states if a distribution is made to a trust and immediately distributed to the beneficiaries, the tax liability is deemed to be in the beneficiary’s personal capacity and therefore taxed at their marginal rates, not that of the trust.

A company will pay 28% tax on profit. If the remaining profit flowed through to beneficiaries as a dividend at 20%, the overall tax paid will amount to 42% of the original amount.

If a straight trust structure were used then, the conduit principle says if beneficiaries fell within the 40% income tax bracket (or below) this structure would be better for tax than using a trust company structure.

Transferring into a trust now vs after death via a testamentary trust:

This depends on a few factors, firstly transfer duty. Because of the nature of the property (farm), the numbers could be quite substantial. If you used a testamentary trust, there would be no transfer duty. There would still be a CGT liability that can be reduced if you create a trust now and structure it with beneficiaries with lower marginal tax rates than you.

Secondly, if you live for the next 35 years, is there a chance you would have a claim on your estate if you had a financial claim against you?

Thirdly, if the farm is transferred to the trust while you’re alive, you have to donate it to the trust and pay 20% donations tax, or create a loan account from the trust to yourself of the farm’s value. This account must by law attract interest at a commercial rate, which is taxable as income in your hands. Under a testamentary trust, this isn’t an issue.

A trust is probably the best vehicle in which to own the farm, ensuring it’s protected for future generations. Should you have no major liabilities in or linked to your personal estate, a testamentary trust is probably the way to go.