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Article by Midrand Accountant: NOSIMILO MTHIMKHULU

On this Monday morning I woke up eager to get my day started. Just last week I had signed on a new client and was due to finish off his website today with his assistance. Not only that, but as of next month I would be doing their bookkeeping and would be able to determine exactly where my client is at financially. On Friday I had sat with the Founder and CEO Steve Pule* as he eagerly shared his vision with me on how he wanted to find a new premises for his enterprise as soon as he finished paying off the mortgage on his house.

‘I don’t believe in debt,’ he told me. ‘If my business does not perform well in a particular month I do not want to be stressing about creditors. I want to sleep well at night,’ he went on. I listened cheerfully, humbled by his work ethic and respect for money. I knew he was a mechanic, with 8 employees, 6 of them working away outside. His business had a good reputation with people coming from far and wide in the region of Gauteng to this VW and Audi specialist. This morning I would get his story and we could review and finalise his website and I could issue him with my first invoice. As I gobbled down last night’s leftovers as breakfast my phone rang.

It was Steve’s brother Tshepo*. He asked me, 3 times, where I was before letting me know that his brother had passed away. I was furious. In what world is that a funny joke! It was not a joke. He explained that it was a hijacking gone wrong. He was on his way to Kempton Park to drop off a client. He later added that he was the first to arrive at the scene. I immediately went to site to see them.

In time it sank in. I kept in touch with the brother. I told him I would help them with the trust for the business so it could be kept running for the benefit of the family. I realised he was uncertain what I was talking about and wondered if Steve had left a testamentary will in the first place. I soon came to realise that many did not understand the purpose and the benefits of a trust. At this point I decided I need sit down and explain this in an article, because the loss of a breadwinner in a family could have devastating consequences if not prepared for.

Well then, what is a trust? A trust is in arrangement where assets are held by one party (the trustee) for the benefit of another (beneficiary) as instructed by the owner (trustor/settlor). In recent decades the continued usefulness of trusts has been questioned as the tax benefits have eroded over time. The National Treasury recently introduced s7C in the income tax act which further tightened the tax provisions applicable to trusts. So what would be the reason to initiate a trust in this day and age? I have taken the liberty of listing a few below;

  • Like companies, trusts can be used as a vehicle to protect against creditors
  • To establish continuity – Efficient succession
  • To reduce certain taxes like estate duty
  • Can be used as an effective planning mechanism for future generations if the assets are kept in the trust
  • They can also be used to achieve the same benefits as a usufruct (the right of use).

These benefits apply to all trusts. As mentioned above trusts are no longer beneficial as a tax avoidance tool. However, special trusts do have additional tax benefits that do not apply to a normal trust. These are trusts that are either created for people with special needs who are not able to provide for themselves financially or a trust created in the will of a deceased person for the benefit of the relatives of the deceased person where the youngest of the beneficiaries is under the age of 18 years. Instead of the current income tax flat rate of 45% applicable for normal trusts, special trusts are taxed at the rate applicable to natural persons meaning the sliding scales would apply. It must however be noted that the trust is still not considered a natural person for tax purposes and therefore rebates and other exemptions such as the s6A and s6B medical tax credits and s10(1)(i) interest tax benefits would not apply.

Further benefits exist for a special trust created for people with special needs. These include;

  • A Capital Gains Tax (CGT) inclusion rate of 40% where any other trust would have an inclusion rate of 80%,
  • This special trust is also entitled to the annual CGT exclusion of R40 000,
  • It is also entitled to primary residence and personal use assets exclusions which the other trusts do not enjoy.

That said when considering creating a trust various factors come to play. It would be advisable to sit with your accountant to determine the purpose of creating the trust and effect it would have on your assets. It is all in all, still considered a useful tool in estate planning and are likely to be are around for a long time to come.

*Pseudo names have been used for confidentiality