16 October 2019 | Nanette Janse van Rensburg
“My wife is pregnant with our first child and I am considering whether to set up a family trust for estate planning purposes. Lately however I have read negative commentary about using trusts, particularly anti-avoidance tax legislation aimed at trusts. I don’t want to start a family trust if it’s not going to be beneficial. What advice do you have in this regard?”
There has been negative press regarding trusts in estate planning and particularly in respect of tax issues relating to trusts. In particular section 7C of the Income Tax Act, 58 of 1962 has been discussed regularly. In the past it was common practice to sell assets to a trust while extending an interest free loan to the trust. The seller would then donate a R100,000.00 (individuals can donate R100,000.00 per year without incurring donations tax) to the trust every year until such time as the loan was written off and the trust owned the assets.
In terms of section 7C any interest rate of less than 8% in respect of loans to trusts is now regarded as a donation. An amount equal to the difference between 8% interest and the interest actually incurred by the trust will therefore be subject to donations tax. Loans of R1,250,000.00 or less will not attract donations tax, as an 8% interest rate applied to R1,250,000.00 is equivalent to the annual donations allowance of R100,000.00.
Section 7C is of course problematic should a trust be created solely for the purpose of saving on tax and estate duty. However, trusts that are used rather as an estate planning tool hold many other benefits and will always have an important role to play in asset protection.
The following are some of the benefits of the use of a trust as part of your overall estate planning:
So, it is clear that trusts are still an important estate planning tool and continue to offer protection and use if utilised correctly. It remains a specialised planning tool and it remains advisable to have the assistance of a fiduciary specialist when deciding to set up a family trust.