The continued use of trusts

The minimisation of estate duty is often the primary motivation for estate planning and many of the tools, structures and techniques used as part of the estate planning exercise are aimed at reducing or avoiding estate duty. One of these tools is the trus

In its suggestions for possible consideration in the tax proposals for 2011 and 2012, National Treasury stated in the 2010 Budget Review that taxes upon death will be reviewed. Although the matter remains to be addressed, it does not necessarily mean that it has been ignored or forgotten – it may well be that such review is taking longer than anticipated or has merely been postponed to a later date. In the meantime, many people are asking whether trusts will still be useful if estate duty is abolished. One way of answering this question (definitely in the affirmative) is to refer to the many other uses and advantages of trusts. A very practical way would be to look at countries where estate duty (or inheritance tax) has already been abolished and to determine whether trusts are still useful in those countries.

Although estate duty no longer plays a part in the estate planning methodologies of trust practitioners in countries such as Australia, Canada and New Zealand, estate planning still remains important and, as will be indicated below, trusts are still very useful and very popular in these countries.

Apart from the advantages in relation to tax, trusts remained useful in these countries in that they provide great flexibility for asset protection, preservation of property, provision for children, passing assets to subsequent generations, reducing probate fees, flexibility with regard to the distribution (and taxation) of income and future divestment of assets for retirement and estate planning.

Research conducted by the Law Commission in New Zealand highlights the popularity of trusts in Australia, Canada and New Zealand by drawing attention to the number of trusts in these countries. The number of trusts illustrates noteworthy familiarity with, and popularity of the trust vehicle in these countries.

There is no definite record of trusts in New Zealand, but indications from the records that are kept (tax returns filed by trusts) reveal a high number of trusts per head of population. For the 2007-2008 tax year, there were at least 237 500 trusts that filed tax returns with Inland Revenue. This number increased from 145 900 in the 2000–2001 tax year. Based on the 2008 figure, the most cautious assessment is that there is one trust for every 18 people in New Zealand. Trusts are, however, only required to file a tax return if they earn income during the financial year and are not required to inform Inland Revenue of their existence if they are not income-earning.

In Australia, an annual tax return must be lodged for a trust, regardless of the amount of income derived - even if it derives no income or incurs a loss for tax purposes. In the 2007–2008 income year, 660 324 trusts filed returns. This equates to around one trust for every 34 Australians.

For the 2009–2010 fiscal year, the Canada Revenue Agency processed around 229 000 resident trust returns and 2 200 non-resident returns. In Canada, trusts must file a tax return where income from the trust property is subject to tax. This equates to approximately one income-earning trust for every 148 Canadians.

In an article on the “Darwinian evolution of the taxation of trusts” the authors conclude that –

“it is worthwhile restating that in Australia family trusts – which are in the main discretionary trusts where the trustee has complete discretion to apply the income of the trust estate among the beneficiaries of the trust – continue to flourish […] and given the additional advantages of wealth planning and the flexibility that trusts offer for tax planning, it is likely to continue as an important feature of business planning in Australia.”

Summary

It seems that existing trusts that were in effect when estate duty was abolished, are still being used and that new trusts are still being established despite the fact that estate duty has been abolished in these countries. It is clear that estate duty saving was never the main purpose for setting up trusts in these countries and shouldn’t be the main purpose in South Africa.

References

PINTO, D. & KARLINSKY, S. 2007. Darwinian evolution of the taxation of trusts: a comparative analysis. Journal of Australian Taxation, 251

THE LAW COMMISSION: NEW ZEALAND. 2010. Some issues with the use of trusts in New Zealand – Review of the Law of Trusts: Second Issues Paper