Essential wealth planning for beneficiaries of B-BBEE schemes

Theunis Ehlers, Partner at Citadel Fiduciary.

You have qualified to share in the success of one of the companies that are the cornerstones of South Africa’s economy by becoming a beneficiary of a Broad Based Black Economic Empowerment (B-BBEE) scheme. This opportunity may present itself only once in a lifetime and, even more importantly, could never have presented itself to generations before you.

Not only will you have the opportunity to uplift yourself and your family, but you will also have the opportunity to effectively ensure the financial security of your descendants.

Even though you may think that it is not too complicated, there can be many pitfalls and better ways to structure your affairs than you may initially think. To ensure that you maximise this opportunity, you would be wise to consult with the right professionals to guide you through the minefields that are inherent to wealth structuring and planning.

Structuring wealth by using a trust

There are many benefits to employing a trust to house the wealth that is created through a B-BBEE scheme.

The main reason for the aforesaid is that the assets (shares or the right to the proceeds of the shares) are often transferred to the trust at a discount to what their true market value is. The true value is unlocked during the duration of the scheme; during which time the beneficiaries are “locked-in” and cannot dispose of the shares or the rights. The end result, at the time when these rights vest, is that these shares/rights are often substantially more valuable than when they were first transferred to the trust.

For more information and an understanding of the basic principles of trusts click here.

Why are trusts beneficial for B-BBEE beneficiaries?

Assets are often transferred to trust by way of loan account. The reason for this is that were you to transfer the assets by way of donation, you would pay donations tax at 20% on the value of the assets. (It is important to consider the potential tax implications of interest free loans to trusts, but that is a topic for another discussion.)

The trust therefore “buys” the asset from you, but as the trust does not have any money to do so, it “owes” you the purchase price. This loan remains an asset in your estate, but the growth in the value of the asset will vest in the trust.

The reason why this is significant to beneficiaries of B-BBEE schemes is that the initial value of the assets (e.g. shares) that are transferred to the trust are often substantially lower than the value of those assets when the scheme comes to an end. In other words, substantial wealth is created in the hands of the trust while the loan from the beneficiary is often worth a lot less.

The aforesaid is only possible if the benefit from the B-BBEE scheme is vested in the trust from the outset. It is therefore essential that you consult with the right professional when you consider participating in a B-BBEE scheme.

Pitfalls for B-BBEE beneficiaries

At Citadel Fiduciary, we act as the professional trustee on numerous trusts that were created by the beneficiaries of B-BBEE schemes. Not only do we advise and assist with the management of the trust, in most cases, we also manage the wealth that is created in these trusts as well.

We therefore have first-hand knowledge and experience of the kinds of pitfalls beneficiaries face, both when they became entitled to participate in a scheme as well as after becoming entitled to the benefits of the scheme. These include:

1. The trust not being created at the inception of the scheme

As stated above, the value of the shares or benefits at end of the scheme is often substantially higher than at the beginning. The effect of this is that substantial wealth is created during the scheme.

It therefore follows that the trust should actually be the beneficiary of the scheme throughout and not the individual. If the individual is the beneficiary and only wants to transfer the benefits to the trust at a later stage, the loan account would be substantially higher with the potential of substantially higher tax implications.

2. Promises being made but not backed-up by documentation

We often find the beneficiary of a B-BBEE scheme “promised” to pay someone an amount of money once the scheme comes to fruition. The problem that arises is that should you pay an amount to another person without receiving something of similar value in return, you would need to pay donations tax at 20% of the amount that you paid over.

Where someone contributed funds to enable a beneficiary to participate in the scheme, it is essential that the understanding between them is properly structured in an agreement. The reason for this is that the legal nature of the agreement and the rights created therein will determine the tax implications of the transaction and who will be liable for it.

3. Multi-generational planning

One of the most important objectives of B-BBEE is to transfer wealth to the previously disadvantaged majority in order to uplift them from poverty. The aforesaid places an obligation on you to ensure that you deal with your wealth in such a way that it is not only you who enjoys the benefits thereof, but to ensure that your descendants, through the generations, benefit too. Again, structuring your wealth through a trust will ensure that the structure (trust) lives on after your death and your wealth will continue to be managed for the benefit of your beneficiaries and descendants.

Consult with the right advisors ahead of time

In each instance, the solution to these challenges is to consult with the right advisors ahead of time, not only to create a structure for you and your family, but more importantly, to properly manage it as well. It is impossible to discuss all the essential aspects of wealth planning for beneficiaries of B-BBEE schemes in one article. For example, we have not touched on the significance of a Will in this article.

Rather, we have shared just some of the aspects that we often find are not attended to – with dire consequences – for the beneficiaries. No single solution is relevant to all problems and circumstances and therefore the solution to your unique circumstances should be developed specifically for you. Consult with the right professional early enough so that they can implement the most suitable strategy for the structuring and management of your wealth.