Tax Advice

The time-tested discretionary trust is not without its pitfalls, but it is one way of avoiding triple taxation.

After-tax money in the bank can broadly be described as ‘capital’. Likewise, a person’s accumulated assets, such as a home, farm, factory, motor vehicle, equipment, tools or coin collection, are all examples of capital. A fairly common life-cycle of an asset is as follows:

• You earn money, which is taxed. You then use some of your after-tax funds to buy a substantial asset, say a home. You improve this over time through additions and repairs, and sell it after a decade or two.

• Capital gains tax could be payable on the sale of that asset. This means that the asset representing the already taxed funds is taxed again. The remaining gain is used to purchase another asset, or is banked as capital in cash.

• When you die, that asset (or the cash) is liable to be taxed yet again, as the value of the asset (or the cash) is included in your estate.

Estate duty

Looked at this way, you are being taxed three times. Firstly, on the money earned, secondly on the sale of the asset, and thirdly on the capital distributed at death, so-called estate duty.

‘Dutiable estate’ is the gross value of all the assets of the taxpayer, less the allowable deductions. Levied on the property of residents and the South African property of non-residents, estate duty rises with the value of the estate: it is 20% on the first R30 million and 25% above R30 million. Fortunately, not all of the property of a taxpayer is so taxable, however. A number of strategies can be employed to ensure that a portion of the assets are placed out of reach of the taxman. The discretionary trust is one.

trusts: safe from the taxman and well-managed

Strictly speaking, assets in trust are never a part of the taxpayer’s estate.

It should be mentioned at this point that the critics of the trust regime are right: it is difficult to place assets in trust tax effectively.

For one, capital gains taxes or donations tax, or both, are payable when assets are moved to trust. Moving fixed property will result in transfer duty as well.

second- and thirdgeneration trust beneficiaries are the ones who really benefit

Nonetheless, worthwhile exemptions can still be found. In any event, secondand third-generation trust beneficiaries are the ones who can really benefit.

Trusts afford two significant advantages: the assets are safeguarded in terms of creditors and commercial risks, and you have a wise trustee on board, which can be of inestimable value.