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Share trusts

01 October 2008 Heather Pretorius, Velosa & Associates

Business owners, either operating under a Close Corporation or a Private Company, often raise the question whether the business should be owned personally or not.

There are several reasons why the business should rather be share trust owned as opposed to being personally owned.

The cost of death

If the business is personally owned and the owner dies, the interest in the business is valued, and the value forms part of the individual's estate for estate duty purposes. This will further have an effect on the executor's fees payable, as executor's fees are calculated at 3.5% of the gross value of the estate and, if the executor is a vendor, then 14% VAT will be levied on executor's fees. Capital gains tax and multiple securities tax will also be triggered upon death. If the business is share trust owned, then these costs will be avoided.

Continuity

If the business is personally owned, there will not be any continuity as the deceased's interest in the business will form part of the winding-up process in the deceased's personal estate. An executor may take over the business, in the name of the estate, during the winding up-process. However, if the business is share trust owned, the continuity of the business is assured as it does not form part of the individual's estate.

In addition to the aforegoing, the business could, for example, take out a Keyman policy on the life of the "key individual/s". The proceeds of the said policy can be used to employ a person who can continue to run the business after the death of the individual concerned and, with the correct structures in place, continue to generate income for the family of the deceased.

Protection of future income

By making the business share trust owned, as opposed to personally owned, the flow of dividends from the business can be structured in such a way to protect the future income of the business by incorporating the family trust as beneficiary in respect of the flow of these dividends.

Protection of the business itself

If the business is share trust owned, it will be protected from any personal exigencies, such as divorce, disputes with business partners and the like.

Compartamentalisation of risk

By making the business share trust owned, the risk of the individual being the owner is curtailed. It is further imperative, in the event of an individual having interests in several trading entities, that these interests are held by separate share trusts as opposed to a single share trust. The main reasoning behind this is that if one business should fold, the other businesses are protected and are not placed in jeopardy by the business which has gone under.

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