The Why and How of Trust Registrations in South Africa
A trust can be set up while you are still alive or it can form part of your will and then becomes effective upon your death. You can do one of three types of trust registrations in South Africa:
Beneficiary rights are directly linked to the type of trust, such as discretionary or vesting trusts. With the discretionary type, the trustees decide and control how much income should be awarded to the beneficiaries, giving the beneficiaries contingent rights to income held in trust. With the vesting type, the beneficiaries hold the vested rights to the income or assets held in trust. There are instances when the discretionary and the vesting trusts are combined such as when used as charitable, asset protection, trading or special trusts.
Two types of special trusts can be registered. The Type A trust is established for the benefit of a beneficiary that is disabled and not able to work, care for themselves, or to manage their finances. The Type B one is established to benefit the relatives or loved ones of the deceased. This can extend to children not yet born and children under the age of 18 as stipulated in the law.
Trust Registrations at SARS
Note that the law requires any form of trust to be registered with SARS. A flat tax rate is applicable where the trust is taxed. Note that the beneficiary and the donor can also be taxed where the taxing of special trusts works on a sliding scale. The trust can be liable for transfer duty, donations tax and for securities transfer tax. It is possible to register the trust as a tax exempt organisation, but several requirements must be met.
Benefits of a Trust
Considering all the taxes payable one may think that it is simply not worth registering a trust, but the benefits often outweigh the tax implications. When it comes to estate planning a trust is an essential tool for the protection of assets. The growth of the assets belonging to the trust is exempt from estate duty. A trust is not a natural person and can thus not die. As long as the asset remains in the trust the trust will not be liable for capital gains tax. The trust, because it is not a natural person, isn’t liable for costs such as conveyance or executor fees.
The beneficiaries are able to receive their benefits from the trust even after you have passed away. Without a trust the assets will be frozen in the estate and your loved ones will not receive any earnings from such until the finalisation of your estate.
With the inherent nature of the trust, the beneficiaries cannot sell their rights in the trust and insolvencies associated with the beneficiaries will thus not affect the assets in the trust. The same applies to the donor or the trustee, ensuring that the assets transferred to the trust are protected from claims by creditors.
The earnings derived from the trust can also be structured in the most efficient way to minimise the tax burden. It is for instance, possible to divide the earnings between the beneficiaries in such a way as to ensure that they each receive their benefits to an amount not exceeding the ceiling amount.
With proper custodianship, the beneficiaries are prevented from wasting valuable assets. This makes it possible to protect a minor from spending their entire heritage on for instance, entertainment. A trust is subject to proper governance, which entails effective management of assets where many parties are owners of such assets.
The above advantages mentioned can only be realised if the correct type of trust is registered and the trust properly managed. For such, it is essential to make use of experienced lawyers or accountants specialising in tax and trusts to help setup a trust as part of estate planning. For this we strongly recommend making use of the expertise offered by The Tax Shop.