• Hilary Dudley, Managing Director

The trust is dead – long live the trust!

Increasing focus on trusts by revenue authorities, both locally and offshore, has created the perception that trusts are being targeted – especially from a tax perspective – and that they are going to become obsolete. The question now is should trusts still be used in estate planning, or has their star faded?

According to Citadel Fiduciary (Pty) Ltd Managing Director Hilary Dudley, trusts still have an important role to play within estate planning if they are formed for the right reasons, offering benefits such as asset protection and continuity.

“That said, it has become much more expensive to hold assets within a trust, and there are less tax planning opportunities now than during the 1970s, when trusts were not even subject to tax,” she notes.

“If your sole objective in forming a trust is to obtain a tax benefit, then you are likely to be disappointed at some point in the future.”

She notes, however, that trusts still offer a number of other highly attractive benefits, and can be an extremely useful tool within estate planning.

“Ultimately, the trust concept has been around for a long time and is unlikely to die any time soon. There are many issues to take into account and we recommend that you speak to a fiduciary advisor before making the decision to form a new trust or to terminate an existing one. This is especially relevant if you or your heirs are planning on emigrating to another country, as tax residence and exchange control issues would become particularly important.”

Key changes to the taxation of trusts

The main change in the taxation of trusts in recent years was the introduction of section 7C of the Income Tax Act, which came into effect from 1 March 2017. This section applies the official rate of interest to low-interest or interest-free loans made to trusts. This was presumably implemented in order to make it more expensive for individuals to transfer assets to trusts.

From a tax point of view, this legislation has made it more costly to fund a trust by means of a loan account. However, it should be noted that this is not the only way to fund a trust, says Dudley.

The only other major change implemented in recent times is the introduction of a stepped rate of estate duty and donations tax. From 1 March 2018, the value of estates and donations above R30 million are taxed at 25% rather than 20%.

The introduction of a stepped rate of estate duty perhaps strengthens the argument for the use of trusts in estate planning, particularly where multi-generational assets such as farms or holiday homes are involved, she explains.

“Although a trust is taxed at a higher rate on, for example, income (45%) and capital gains (36%) than an individual, a trust is a legal person rather than a natural person or a human being, and accordingly it is not subject to estate duty or death taxes. If a holiday home or a farm is held in the name of the individual family members, the family would be liable to pay estate duty on that asset on the death of each individual owner as it passes from one generation to the next. This could become particularly onerous from a liquidity perspective if large amounts of estate duty are paid every generation,” she says.

Additionally, growing awareness of global issues such as situs tax further evidences the value of trusts in estate planning. Situs tax is the name for a death tax levied on assets located in countries such as the United Kingdom and United States, even when they are owned by non-residents of that country.

Although there are rules in place to prevent paying tax on the same assets twice (double tax), an issue may arise if the tax in the foreign country is levied at a higher rate than in South Africa. In the UK and the US the rates of death tax is up to 40%, whereas in South Africa it is a maximum of 25%. Individuals could therefore end up paying death tax on their assets at a higher rate.

Given the exchange control restrictions on holding direct offshore investments in local trusts, South Africans may consider the use of offshore trusts to achieve the same estate planning objectives.