Trusts no longer estate plan go-to

CHANGES MEAN YOU MAY INCREASE YOUR FAMILY’S TAX LIABILITY Only a handful of people will truly benefit from having a trust.

The average household dynamic and life expectancy of a few decades ago is very different today. In the past, the man of the household would often join a company for life and when he retired, he’d receive a pension fund from the company.

With a stay-at-home wife and a few kids, a husband would perhaps see it as a wise financial decision to set up a trust for his wife, who’d probably outlive him by at least a decade.

People of today live much longer and the money they’ve saved must go a lot further.

Instead of being primarily focused on the amount of wealth their children will inherit, the average middle class person should be more concerned with issues such as whether their wealth will support them until they die.

If your estate is big, you could still benefit from having a trust. But everyone else should think twice before establishing a trust, because with recent law changes it may increase tax liability.

Tax issues are either misguided or no longer relevant

A trust is taxed significantly more than an individual would be. While there are options available to avoid being taxed heavily, this doesn’t necessarily solve the problem or give effect to the original estate plan.

The law regarding estate duty and tax has changed significantly over the past decade, and some of the standard estate planning principles are no longer relevant. We no longer need a trust to secure the full benefits of the estate exclusions.

There’s a cost to setting up and continuously administering a trust, and a cost to getting the assets into a trust.

If the founder ends up using the value attributed to the trust for their retirement years, then it has little value in estate planning.

With more recent tax law amendments that focus on the loans created to facilitate transferring the assets to the trust, there’s an additional tax liability.

Either the loan is interest free, or low interest, which results in a deemed donation each year; alternatively charging the required interest on the loan results in the increase in the loan value (effectively increasing the estate value) and increasing the founder’s taxable income with the interest earnings.

The current challenge most people have with trusts set up to hold assets, is how to get rid of the contra loan accounts.

Note, a trust isn’t only used for tax-planning purposes, as it could still be an effective way to protect your assets.

Anyone considering setting up a trust, and those currently with assets in a trust, should ask their financial advisors a few critical questions such as: is there really value in having a trust and should restructuring be considered to derive more benefit from it?

For the average citizen, however, focusing on a good retirement plan is much more important than being set on having a trust.

Ettiene Retief is chairperson of the national tax and Sars committee of Saipa