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It is a common perception that trusts are only for the very wealthy, but they have purposes in the focused area of investments and investment planning too.
Though trusts have their negatives, one of their biggest advantages, says Ian de Lange of Seed Investment Consultants, is to peg the value of an estate for purposes of estate duty.
"The basic premise is that once one divests oneself of an asset, whether by selling or by donating to a trust, then that asset is no longer his," De Lange says.
Property owners can benefit because by just placing a property into a trust, they can protect this valuable asset and the future income of their family.
Ian McDonald, national manager of financial planning at Ooba (formerly MortgageSA), says while giving up ownership of your property may appear scary, a trust ensures that a property is well out of the clutches of creditors because it is the only entity that benefits from total asset protection.
"The owner can still enjoy the benefits of the property, such as rental income or as a residential home, but without the risk."
McDonald says another big benefit is that the property no longer falls into your personal estate and is not subject to inheritance tax.
"Ownership and benefits are passed onto your family quickly and without complex tax issues."
In South Africa, minors are not allowed to inherit any assets so a trust protects your children.
Trustees will administer the assets until beneficiaries reach a certain age. In South Africa this is usually 25 years old.
It also does away with the need for an estate executor, who is entitled to a maximum of 3,7percent of the estate's value.
An executor is responsible for winding up the administration of a decreased's estate, taking control of assets, settling liabilities and distributing the net assets in terms of the will.
But trusts are not without complications. Potential problems with trustees and high tax rates need to be carefully considered.
McDonald says to be aware that you are transferring the control of the property out of your direct control.
"A typical problem is when the relationship between a founder and a trustee goes sour. It can happen during divorce or other family disputes."
He says such disputes can result in beneficiaries not having access to the income or benefits.
"The founder needs to carefully choose trustees and weigh up the chances of any disputes against the other benefits of the trust and consider carefully whether a trust is the best vehicle," he says.
"Another potential disincentive is that the transfer duty when a trust acquires an immovable property is higher than an individual's, at a rate of 10 percent."
Since 1991 trusts are subject to tax. Income not distributed to beneficiaries is taxed at a flat rate of 40percent.
Trusts also attract the highest capital gains tax, says McDonald. Fifty percent of all profits on the sale of trust assets are included in a trust's taxable income and taxed at a rate of 40percent.
This results in a net capital gains tax cost of 20percent of the capital gain.