|Living Trusts (Inter Vivos) in South Africa|
These types of trusts, which are taxed at the same rate as a natural person, may only be created to benefit a person suffering from serious mental illness as described in the Mental Illness Act, No 18 of 1973, or who suffers from serious physical deformity. Testamentary trusts benefiting any living family member, of whom the youngest turns 21 in a tax year, may in certain cases also be classified as a special trust.
|Living Trusts (Inter Vivos) in South Africa|
|Written by Louwrens Koen|
|Wednesday, 09 June 2010 06:54|
In South Africa, there are basically three types of trusts. These are living trusts (in South Africa called inter vivos trusts), testamentary trusts and bewind trusts.
Testamentary trusts are created at the winding up of a deceased estate following a specific stipulation in the deceased person's will that a trust must be set up. Testamentary trusts are usually created to hold assets on behalf of minor children, since minor children can not in terms of South African law inherit anything (in the absence of a trust, assets from the deceased estate left to minor children are sold, and the money is paid to them when they reach adulthood). Bewind trusts are created as trading vehicles providing trustees with limited liability and certain tax advantages.
There are two types of living trusts in South Africa, namely vested trusts and discretionary trusts. In vested trusts, the benefits of the beneficiaries are set out in the trust deed, whereas in discretionary trusts the trustees have full discretion at all times about how much each beneficiary is to benefit.
Parties to the trust
There are three parties in a living trust, namely the founder, the trustees and the beneficiaries. The trust is managed by the trustees for the benefit of the beneficiaries. The beneficiaries can be any legal persons, including living people, other trusts, and registered businesses. Trustees may also be beneficiaries.
Establishing a living trust
The trust is created by drafting a trust deed (usually in co-operation with an attorney specialising in trust law) and registering the trust with the local High Court. The trust becomes effective as soon as it is registered.
One of the main advantages of a living trust is the protection of assets from creditors. In an ideal situation, since assets held by the trust aren't owned by the trustees or the beneficiaries, the creditors of trustees or beneficiaries can have no claim against the trust (there are exceptions). A common scenario of using living trusts for asset protection is a husband and wife acting as trustees along with a third unrelated trustee. The trust is granted a loan equal to the value of their assets, then the trust buys their assets using the loan, and finally the trust pays off the loan over time. When any of trustees die, the trust and any assets owned by it, remain unaffected.
Assets transferred into a living trust remain at risk from external creditors for 6 months if the previous owner of the assets is solvent at the time of transfer, or 24 months if he/she is insolvent at the time of transfer. After 24 months, creditors have no claim against assets in the trust, although they can attempt to attach the loan account, thereby forcing the trust to sell its assets.
Assets can be transferred into the living trust by selling it to the trust (through a loan granted to the trust) or donating cash to it (any person can donate R30 000 per year tax free; 20% donations tax applies to further donations within the year).
In terms of South African tax law, living trusts are considered tax payers. Two types of tax apply to living trusts, namely income tax and capital gains tax (CGT). A trust pays income tax at a flat rate of 40% (individuals pay according to income scales, usually less than 20%). The trust's income can, however, be taxed in the hands of either the trust or the beneficiary. A trust pays CGT at the rate of 20% (individuals pay 10%). Trusts do not pay deceased estate tax (although trusts may be required to pay back outstanding loans to a deceased estate, in which the loan amounts are taxable with deceased estate tax).
The taxpayer whose residence has been "locked" in to a trust has now been given another opportunity to take advantage of these CGT exemptions. The Taxation Law Amendment Act was promulgated on 30 September 2009 and takes effect on 1 January 2010 allowing a window period of 2 (two) years from 1 January 2010 to 31 December 2011 for the opportunity of a natural person to take transfer of the residence with advantage of no transfer duty being payable or CGT consequences. Whilst taxpayers can take advantage of this opening of a window of opportunity is not likely that it will ever become available thereafter.
|Last Updated on Wednesday, 09 June 2010 07:02|