Advantages Of Trusts

Trusts can have an important role to play in estate planning and will affect your decision on how much risk and investment life assurance you require, Harry Joffe, the Chief Legal Advisor of Discovery Life says.

The Star, November 22, 2003


By: Bruce Cameron

Trusts can have an important role to play in estate planning and will affect your decision on how much risk and investment life assurance you require, Harry Joffe, the Chief Legal Advisor of Discovery Life says.

This is because setting up a trust will affect how much estate duty and capital gains tax (CGT) your estate will pay and the provision you make for your dependants after your death.

When you die, your net assets (your assets less your liabilities) are subject to estate duty of 20 percent, after an initial exemption of R1.5 million.

In addition, Joffe says, because death is regarded as a CGT “event”, gross assets are subject to tax at the marginal tax rate you were paying in the year of your death, after an initial R50 000.00 exemption.

Assets left to a spouse or partner are exempt from both estate duty and CGT.Estate duty becomes payable when the surviving spouse or partner bequeaths the estate to other beneficiaries. Your partner can be someone of the same or the opposite gender with whom you have a long-term relationship. The law does not define what constitutes a long-term relationship, and the surviving partner would have to show that the relationship was permanent.

Joffe says another tool you can use in estate planning is donations. This is because donations between spouses and partners are not subject to donations tax. And you can donate up to R30 000 a year without paying donations tax. Any amount in excess of R30 000 is taxed at 20 percent. In effect, the exemption allows a couple to donate R60 000 a year to a trust or to other beneficiaries. However, you cannot accumulate the exemption. If the exemption is not used in one tax year, it cannot be carried through to the next tax year.

Joffe says a trust is a key tool in estate planning for wealthier individuals. A trust is effectively an entity which separates control over an asset (by you and other trustees) from the enjoyment of the benefits of that asset (by you and others).

You need, however, to transfer the assets to the trust without paying donations tax. One way to achieve this is for you, the donor, to provide a loan to the trust. Only the loan account remains in your estate.

The three main uses of a trust are:

  • To freeze the value of an estate which has a high asset value.
  • In other words, if you transfer an asset to a trust, the asset’s value does not grow in your hand which would increase the amount of estate duty that will have to be paid on your death.
  • To hold and protect assets for minors/incapacitated dependants.
  • To protect assets in the event of insolvency. Creditors cannot claim money held in a trust. This assumes you did not deliberately put the assets in the trust to defraud creditors. Remember, however, that if you set up a loan account for the trust, that loan account can be attached by creditors.
  • The loss of legal control of assets. Your assets are handed over to the trust and are managed by the trustees for the benefit of the beneficiaries. You no longer own the assets, but you can exercise some control over them by being a trustee.Joffe says you, as the donor to the trust, can also be a trustee. You can also be both a trustee and beneficiary. It is preferable to have three trustees – namely yourself, a family member and an independent trustee. You need to exercise care when selecting the trustees – for example, a spouse could become an ex-spouse. You do not have the power to veto decisions, and you can be out-voted by the other trustees.

    As the donor, you cannot be the sole trustee or control the trust. If you are the sole trustee, you could fall foul of the Estate Duty Act, in terms of which you would be seen as controlling the trust for your own benefit. In this case, the assets in trust would be added to your estate.

  • Costs. You need to weigh up whether the costs of establishing a trust are sufficient to balance out any estate duty that may be saved.


Joffe says there are a number of advantages to placing assets in a trust for estate planning purposes. These advantages include:

  • Saving on estate duty. The growth on assets, such as shares, transferred to a trust is not subject to estate duty, because the growth belongs to the trust. If you have made use of a loan to the trust, the value of the asset as at the date of transfer remains an asset of your estate because of the loan account in your estate.
  • A trust does not die. This means that a trust is not liable for estate duty, other taxes or costs, such as transfer duty, executor’s fees, or conveyancing fees, that would be payable in the hands of your estate or heirs. Also, the trust does not pay CGT as long as an asset is not sold.
  • Fixing value. The value of any assets transferred t a trust is effectively frozen for estate duty purposes. If you have made use of a loan account, the value does not grow, but remains fixed, effectively freezing the value of the asset at the time the asset was transferred.Say, for example, you transfer shares worth R1 million to a trust on a loan account. In 10 years’ time, the shares are worth R4 million, but in your estate the “asset”, in the form of a loan, is still only worth R1 million – and, if you then die, your estate will save R600 000 of estate duty.

    Loan accounts can be reduced by loan repayments using the annual R30 000 donations tax exemption. And remember that both a husband and wife can make donations, increasing the amount to R60 000 a year. No interest needs to be charged on a loan to or from a trust.

    When the loan to the trust has been paid or written off, donations can still be made to a trust, which then invests the money in a growth investment, such as a life assurance endowment (investment) policy. When the investment matures, the trust can lend the money back to you, the donor. You can use the money for things such as school fees, so no new assets are added to your estate.

    When you die, your estate will have to pay back the money to the trust. This liability reduces the size of your estate and the estate duty payable.

  • Trusts continue to pay benefits to dependants (beneficiaries) after you die. On the other hand, assets in your estate may note be freely available to your dependants, because your estate is frozen during the winding up process. This may result in your dependants not receiving an income until after your estate is finalized.
  • Protection of assets. A beneficiary cannot sell a right in a trust (unlike shares in a company). Likewise, if you, as the donor, or the trustees become insolvent, the trust’s assets remain protected.
  • Tax-efficient income splitting. Joffe says that income from a trust can be structured in a number of ways to provide tax efficiency. For example, R100 000 earned by a trust can be split between five beneficiaries so they earn R20 000 each. Assuming they earn no other income, they would pay no tax as this amount is below tax threshold.However, Joffe warns that the South African Revenue Service (SARS) is very aware of these transactions and has a host of anti-avoidance legislation at its disposal to curtail them. A trust should not be established merely to avoid tax.

    SARS can stop any abnormal transactions entered into purely to avoid tax. If the beneficiaries of a trust are minors and assets are transferred to the trust on a loan account you, as the donor, are taxed on any income or capital gains made on the assets transferred to the trust.

    Joffe says trusts can be used for good and bad. An example of a bad use of a trust would be to transfer all your assets into a trust to avoid paying out a spouse on divorce.

    But equally, he says, a trust can be used for the good of a divorced spouse. Many maintenance obligations continue after death, until the ex-spouse dies or remarries. On the death of the spouse who has the maintenance obligation, his or her former spouse will lodge a claim against the estate for the maintenance obligation, and this can delay winding up the estate and result in possible conflict with the beneficiaries. The solution is to create a trust on the death of the spouse who has the maintenance obligation, so that the trust takes over the maintenance obligation and carries on paying income to the ex-spouse.

    When the maintenance obligation expires, the balance of the capital in the trust can be distributed to the deceased’s heirs.


Joffe warns that there are tax consequences to placing assets in a trust. These include:

  • Trusts can pay a flat rate of income tax of 40 percent, and an effective rate of CGT of 20 percent, against the top effective CGT rate of 10 percent for individual taxpayers. The exceptions are if the trust is a special trust for mentally or physically handicapped people, or is a testamentary trust for minor children.
  • Transfer duty at a flat rate of 10 percent is payable on any property bought by a trust.
  • If a primary residence is held by a trust, the CGT exemption on the first R1 million in capital gains made on the sale of the property falls away.

However, Joffe says the tax paid by trust can be reduced by:

  • Using tax-efficient investments, such as capital growth investments or investments that pay dividends, which are tax-free.
  • The trust paying beneficiaries in the same tax year. The beneficiaries and not the trust – pay income tax at their lower marginal rates.
  • A trust distributing a capital gain to the beneficiaries in the same tax year as the capital gain is made. The beneficiaries pay CGT on the capital gain at their lower rates of CGT – as long as tax avoidance legislation is not contravened.


Joffe says there are a number of costs associated with trusts, including:

  • Legal fees to register the trust. These can range from R2 000 to R5 000 and more if the structure is complex.
  • Trustees’ fees for administering the trust.
  • Audit fees. Some Masters of the Supreme Court insist that an auditor is appointed to audit a trust before they register it.

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