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SA Farmer: what you need to know before you trust a Trust for Tax relief

By May 30, 2019April 9th, 2021Financial emigration, Tax relief

SA Farmer: what you need to know before you trust a Trust for Tax relief

May 30, 2019

trusts-in-south-africa

As a farmer, you truly understand the concept of trust, perhaps more than the average South African. Living with uncertainties is a daily reality for you and your loved ones, especially if you decide to emigrate, but there are certain plans that you can put in place to make things easier. Establishing a legal family trust can certainly be one of them, but only if you do it for the right reasons, and tax relief, is not really the right reason.

 

What is a trust?

 

To clearly understand the advantages of a trust, we need to look at the basics without all the sometimes confusing legalise.

 

The term “trust” simply describes the relationship (or fiduciary arrangement) between the parties involved. In laymen’s terms, a trust is a legal agreement that is created to manage or hold assets for the benefit of certain individuals or your beneficiaries.

 

A trust can be created either during your lifetime (called an inter vivos trust), or on the death of the founder as part of a last will and testament (called a trust mortis causa or a testamentary trust).

 

Who is involved with a trust and why?

To make sense of a trust, you need to know not only who are all the parties involved, but also to understand the different duties they have to fulfil. Typically, in an inter vivos trust, these would be:

  • the donor/funder – the person who creates a trust while still alive, usually with a small donation to cover the establishment costs,
  • the funder – the person who provided the actual funding of the trust or the person who was responsible for the growth thereof. The donor/funder may or may not be the same person.
  • the beneficiary (beneficiaries, if more than one person) – a person who is entitled under the trust deed to benefit from the trust assets administered by the trustees, by way of an income and/or capital distribution. Any natural person (including a trustee on behalf of another trust or a legal person) may be a trust beneficiary.
  • the trustee(s) – who takes full control and responsibility of the assets donated to the trust and administer the assets as laid down in the trust deed, and
  • the powerholder/protector – the donor empowers another person, the powerholder/protector, to instruct and oversee the actions of the trustees. This person also has the power to appoint and remove trustees.

 

With so many role players, it is critical to have a clear goal or objective for your trust.

 

Reasons for the establishment of a trust

There are many sound reasons for the establishment of a trust. These can include estate planning, succession planning for a family business, or creditor protection, to name a few. Many of these reasons relate to the protection of the property in your estate (as trust assets do not form part of the estate of the donor, trustee or beneficiary of the trust). If one of the parties to a trust is insolvent, the assets of the trust cannot be attached by creditors.

 

Trusts that are established for estate planning purposes are normally done to avoid or minimise the payment of estate duties and/or to provide for minor children should both their parents die or become incapable of looking after them while they are still minors. Trusts can also be a useful means to manage and protect the interests of beneficiaries who are incapable of dealing with their own financial matters.

 

Proper management of a trust is critical

It is important to realise and make sure that once a trust is established, it must be properly structured, managed and administered as a separate entity to the founder, one particular trustee, and its beneficiaries. This means that the trustees must correctly comply with their duties, as set out in the trust deed. This trust deed is an essential legal document that outlines the stipulations of a trust, for example, the duties and powers of the trustees, details of the income beneficiaries and income distribution events, details of the capital beneficiaries and capital distribution events, and the termination of the trust.

 

If you cannot demonstrate that the trust is a separate entity and it is evident that trustees do not meet regularly, that sloppy minutes, accounting records and resolutions exist, and there is either no independent trustee, or a dominant trustee, or that you, as the founder, has retained some level of control in the trust deed, then your trust can be deemed your alter ego (an extension of yourself). Your trust will then be disregarded, and the assets will be treated by the court as if they belonged to you. In short, an alter ego trust transpires when the necessary requirements for a valid trust are in place when the trust is established, but the trustees act as puppets mainly under the instruction of the founder or another trustee.

 

Although SARS is slowly, but deliberately closing all the tax loopholes related to trusts, the irony is that trusts in South Africa are relatively unregulated and the Trust Property Control Act (Act 57 of 1988) only regulates the administrative aspects of trusts. However, should a trust have an emigrant (a South African resident who has taken up permanent residence abroad) or a non-resident beneficiary, there will also be exchange control implications to the transferability of distributions from South Africa.

 

Trusts and exchange control…be aware

Exchange controls comes into effect when a capital or income beneficiary of a trust is an emigrant or a non-resident. While it is widely recognised that inter vivos trusts are mostly established for legitimate purposes like estate planning, it can also be used as a conduit to export capital from South Africa. Therefore, the remittance of any income and capital emanating from these trusts to emigrants and non-residents from South Africa requires the prior approval of the Financial Surveillance Department of the South African Reserve Bank.

 

The purpose of this control is to firstly ensure that the emigrant or non-resident is legitimately entitled to the funds emanating from the trust, and secondly, to ensure that capital is not disguised as income transfers. A contravention of these exchange control regulations are a criminal offence in South Africa.

 

You need someone you can trust

We all know that farming in South Africa has many challenges, which sometimes forces farmers or their children to explore a new and safer existence in other countries. This is not an easy decision and it is of the utmost importance that you seek expert advice to increase your chances for success.

 

It is in particular not easy to manage your financial emigration planning on your own, including the decision whether establishing a trust is a suitable vehicle to meet your objectives. The circumstances of each family and trust are unique and must be clearly understood to establish whether income and capital distributions emanating from a trust will be eligible for transfer abroad. Make sure you can trust your trust.

 

FinGlobal is a cross-border financial services company that provides premier financial emigration services to South Africans all over the world. FinGlobal is a licensed South African Financial Services Provider and proud partner of Bidvest Financial Services.

 

Trust in practice: Farmer ABC
Farmer ABC is also a father, who created a trust and donated various farms and properties to the trust. The control of the trust assets is handed over to the trustees, and they are, therefore, under an obligation to manage the trust assets on behalf of the beneficiaries. As a result, the content of the trust deed is of great importance to the trustees because it determines how they must manage and administer the trust. In addition, Farmer ABC should clearly describe the beneficiaries of the trust because without beneficiaries, there is no valid trust. The next requirement is that Farmer ABC must clearly define the trust assets in the trust deed, as he donated several farms and properties to the trust. There was thus a physical transfer of the properties to the trust. The last requirement for a valid trust is that the trust purpose should be legitimate and clearly defined, as the absence of a trust purpose will result in the trust being invalid. The trust purpose may not infringe upon good morals or public interest, and any discriminatory provisions will not be enforceable.

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