Trusts remain an effective family financial planning tool, despite stricter tax controls

28 August 2023 Mariska Redelinghuys, Legal Specialist: Advice at PSG Wealth
Mariska Redelinghuys

Mariska Redelinghuys

Despite having fallen out of favour in recent years due to the implementation of stricter measures to prevent tax avoidance, trusts are still one of the most effective estate planning tools for families, even more so when you take family pricing into consideration.

A trust is a legal structure set up by a founder into which assets are transferred and administered by trustees for the benefit of one or more beneficiaries. The assets are administered in accordance with a trust deed (in the case of an inter vivos trust) or the deceased’s will (in the case of a testamentary trust).

Some of the ways in which your family can benefit from including a trust in their estate plan are explored below.

Estate pegging
Estate pegging involves transferring assets from an individual’s estate into a trust via a loan account. The benefit of this in family financial planning is that whilst the loan account will remain an asset in the estate of the deceased family member, growth on the asset will be allocated to the trust, thereby limiting future executors’ fees and estate taxes payable by the estate of the deceased family member.

A trust does not die
When a family member who is a trustee passes away, the assets in the trust are not frozen while the deceased trustee’s estate is being wound up (as would be the case with assets in their personal estate). Beneficiaries of the trust who are dependent on the trust for income payments would therefore continue to receive these payments to cover their living expenses without interruption or delay. Unlike family assets in the name of an individual, family assets in the name of a trust don’t change hands intergenerationally from one personal estate to the other, so no estate or transfer fees and taxes are payable in respect of these assets.

Protection of assets
Since the assets of a trust are held in the name of the trustees, they are protected against the creditors of the founder, trustees and beneficiaries (who are separate legal entities to the trust). Keeping assets in trust on behalf of a minor beneficiary or a family member with special needs is another form of protection – particularly if the family is concerned about a minor’s legal guardian or are worried that a dependent family member with special needs will be taken advantage of should they pass away.

Tax efficiency
Income accruing to a trust is currently taxed at a rate of 45%, and capital gains accruing to the trust are currently taxed at an effective rate of 36%, which are both higher than the respective rates applicable to individuals. However, by allocating the income or capital gains to the respective beneficiaries via what is known as the “conduit principle” it will be taxed at the beneficiaries’ marginal tax rates, which is a benefit if the recipients of the income are taxed at lower marginal rates.

Different families have differing financial planning needs

Family financial plans are dependent on the needs of the family, so it is important to seek advice that is relevant to your specific situation. For example, a young family is less likely to have accumulated assets substantial enough to consider a trust, and their family’s priorities may be better addressed with long-term insurance solutions or retirement savings. Speak to your financial adviser about what is suitable for your family’s needs.

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