Financial Planning with trusts

01 August 2013 Ian van Greunen, Trust Management Solutions

In South Africa today, trusts remain one of the best mechanisms of protecting assets for whatever reason the estate planner may need, such as for asset freezing in estate planning.

With this said, trust law does not exist in South Africa as Roman Dutch Law recognises the concept of trusts. However, the Trust Property Control Act of 1988 also guides planners as to how to properly govern and take care of the assets in trusts. Currently, there are two ways in which a trust can be created and treated under the law, and this is namely by contract, commonly referred to as trusts in the strict sense, and by last will and testament, also referred to as trusts mortis causa.

Legislative framework
Allied to this is legislation that also recognises trusts in terms of how legislators are to handle trusts, with the most notable being the Income Tax Act and the Eighth Schedule. What is becoming more prevalent however is that the courts are handing down more and more landmark rulings regarding trusts and as the case law builds, so precepts are being entrenched around this ‘non-entity’.

There has however always been discussion around planning with trusts, and what has thrown the proverbial cat amongst the pigeons, was the statement made about trusts by Minister Pravin Gordhan in his Budget Speech in February this year. Almost overnight, trusts become a no-go topic amongst financial planners and the practical application of trusts in estate planning seems to have flown out the window.

Storm in a tea cup

However, when looking into the Budget Speech’s proposal in further detail, the following conclusions can be drawn: Trusts set up for minors, elderly and the incapacitated will remain as is. The conduit or flow through principle to a large extent also remains unchanged from an Income Tax calculation perspective.

On closer examination the current flow through principle will change, with "income” losing its nature inside the trust, but distributions still remaining as annual deductibles.

The same could also be attributed to Capital Gains if the Minister’s wording is read very carefully, although the Minister did propose for Capital Gains Tax (CGT) to be calculated and payable at trust level. The Minister also proposed stopping the practice of trusts being used as estate planning vehicles.

Necessary changes

Should these proposed amendments be implemented, the following will need to change from a legislative perspective: Section 25 B of the Income Tax Act will need to be adjusted, Section 80(2) of the Eighth Schedule will also come under the spotlight and lastly, a review of the Estate Duty Act, specifically Section 3, will need to be changed in order to recognise trust property as property of the deceased estate.

When looking at these changes, one needs to look at what the prime motivator is behind the proposed changes, and the answer lies in the ‘abuse of the trust form’.

There has been a few landmark decisions handed down by the courts around trusts and their governance, with one being the Badenhorst Case, where assets were removed from the trust due to no governance by the two trustees, and awarded to a spouse in a divorce order.
In this case there was absolutely no governance of the trust whatsoever, as there was no distinction between trust assets and personal assets, or benefit for the trustees.

Due to the little to no governance of trusts currently in the country, financial planners should expect legislation around trust governance to tighten significantly, as it is through governance that the courts and authorities are so easily able to pierce them. However, trusts still remain an excellent estate planning vehicle should the governance around the vehicle be taken seriously.
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