Paying attention to trust structures can avoid surprises
● Trusts have become a popular planning tool for wealthy South African families to manage their fortune, but constantly changing tax laws and a greater scrutiny of trusts by tax authorities worldwide mean that South African trust structures need to be reviewed regularly.
This is particularly important if family members have left SA to live abroad and they receive income or other benefits from the local trust.
Herman Troskie, MD of private clients at global advisory and administration firm Maitland, says there may be adverse tax consequences for individuals who are beneficiaries of a trust, depending on the country where they are tax-paying residents.
Cheryl Howard, the MD of Maitland Family Office, cites an example of a local family where a daughter is a beneficiary of an SA registered trust. Because she is a naturalised citizen and tax resident of the US, her distributions from the South African trust are taxed in the US.
The US does not differentiate between income and capital gains, which are taxed at a lower rate in SA, and treats all trust payouts as income.
That country also places punitive taxes on dividends that accumulate in the trust and where the payment to beneficiaries is deferred to a later time.
Once a US citizen, you must declare your financial affairs to the US tax authorities even if you live outside the US. And if you are a beneficiary of a tax structure outside the US, that non-US structure is dragged into the US tax net, Troskie says.
Howard says families who are spread across the world should also be aware that a South African trust may not legally hold a foreign-currency, foreign-domiciled investment. To hold assets offshore, a South African trust may need to be unwound, the assets moved offshore with permission of the Reserve Bank, and a new offshore trust structure set up, she says.
If your family and your assets are scattered across the world, you need to review your South African trust structure regularly because the tax rules of different countries change all the time, Troskie cautions.
It may be that your local trust is no longer suitable for its purpose and it may be necessary to set up a trust in the foreign country you now live in to ensure compliance with that country’s legislation and reduce the taxes payable, he says.
Benefits of a trust
Marteen Michau, the head of fiduciary and tax at Sanlam Private Wealth, says given that 35% of SA’s high-net-worth individuals are over the age of 60, a massive intergenerational wealth transfer will happen at some point in the not-too-distant future.
She suggests these families use a trust to prevent the family fortune being lost by subsequent generations who may not be good at dealing with money.
Research indicates that the fortunes of 70% of high-income families are likely to be lost by the second generation, she says.
Trusts have been given a bad reputation as tax-avoidance vehicles but a correctly managed trust with independent trustees and sound corporate governance is an excellent tool for estate and succession planning.
Trusts are typically used by people whose estates exceed or are likely to exceed R3.5m on death.
Placing assets in a trust can minimise estate duty levied at 20% of the value of the estate that exceeds R3.5m.
In addition to minimising estate duty, a properly structured trust can ensure capital and income from assets held by the trust are distributed to beneficiaries, such as children, and a lower tax rate paid than the tax rate of the trust, Troskie says.
“It is advisable to work with a fiduciary and tax expert who can look at all the options and can facilitate family indabas to discuss the nuts and bolts of securing your family’s legacy,” Michau adds.
Governance
Troskie says many people set up a trust and continue to manage the assets in a trust as if it is their own piggy bank, but this is not the way a trust should be managed.
According to Howard, since March 2016 the Master of the High Court insists on the trust having an independent trustee.
Van Zyl adds that the mere appointment of an independent trustee is not enough. This trustee must play an active role in the decision-making process, apply his or her mind and act independently in the best interest of all the beneficiaries of the trust.
Furthermore, Howard says that “mom, pop and family friend” trustees who serve on many trusts are ill-equipped to deal with international regulatory reporting standards that require trustees to notify the respective tax authorities about capital and income distributions to beneficiaries.
For instance, if trustees pay interest to a nonresident beneficiary, the trustees are obliged to withhold 15% of the interest as a withholding tax, she says.
The SA Revenue Service takes the view that capital gains distributed to a nonresident beneficiary are subject to the higher tax rate that applies to the trust, Howard says.
A total of 80% of the capital gain from the sale of a trust asset must be included in the income tax return of the trust and it is then taxed at 45%. Sars is believed to be fighting several cases on this issue, she says.
Professional trustees not only make sure that the planning and maintenance of your trust structure is done in a way that withstands attack from legislative changes, but also brings an independent perspective to family wealth planning, Troskie says.