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PROPERTY: Do Trusts Still Have a Role to Play in Estate Planning?


Recent Gauteng Business News

GENERALLY, people are not keen to pay tax if they feel that they are not getting a suitable return on the taxes they contribute. So, in countries where State services operate efficiently, and where citizens benefit from world-class medical services provided by the State and from substantial State pensions, members of the public may feel more comfortable paying taxes writes Sean Gaskell.

But, for many, there is a perception that governments do not utilise the tax revenue in the best possible way, and so people look for ways of limiting the extent of their tax liability.

This has facilitated a financial services industry across the globe, which focuses on identifying ways in which people can, legally, structure their financial affairs in a tax efficient manner.

But, in South Africa, many are sceptical about this. Having been listed in the World Bank’s Gini Index this year as the most unequal society in the world in terms of income distribution, there are those who feel that it is not ethical for wealthy South Africans to structure their financial affairs in a way that legally reduces their overall tax burden.

It is this thinking that prevails in the Davis Tax Committee’s approach to the use of trusts for estate-planning purposes. And the recommendations made by the Committee have left many wondering whether there is still a place for trusts in estate planning.

Trusts have in the past been a central tool for estate planning. Advisors have recommended that a high net-worth individual transfers assets, in particular those with good potential to grow over time, into a trust, recording the value of the assets as a loan to the trust. As the new owner of the assets, the trust would not be liable for Estate Duty or Capital Gains Tax, since it does not have to be wound up when the founder of the trust passes away. The aforementioned is different where the assets are held by an individual, as the death of the person triggers a deemed disposal, which results in Estate Duty and Capital Gains Tax.

Flowing from the Davis Committee’s recommendations, the Income Tax Act has been amended to include section 7C. In order to avoid the application of section 7C, the provision makes it necessary for the founder of the trust to either pay Donations Tax on the assets transferred into the trust, or to levy interest on the loan to the trust.

While this may seem like a costly exercise for the founder of the trust, making trusts less attractive, section 7C only kicks in if the annual interest on the loan exceeds R100 000. Hence, large loan accounts to a trust attract high tax inclusions annually.
But the trust still remains a useful tool, especially in cases where the founder establishes the trust at a relatively young age by transferring growth assets of a fairly small value at the time of transfer.

It would be prudent, however, for high net-worth individuals to consult a qualified expert in the field of estate planning on a regular basis and so keep up-to-date with any further developments in this environment as compliant solutions do exist.

Section 7C is quite possibly the first element of measures by the State to garner more revenue from the wealthy.

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