Gareth Collier of Crue Invest details the attraction of these trusts and how to determine whether having one would be right for you.

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BOITUMELO NTSOKO: A living trust can be a powerful tool for achieving specific estate-planning goals, but there’s a lot to understand about how they work and whether they’re the right fit for you. To help us navigate this, we have Gareth Collier, who is a certified financial planner at Crue Invest. Welcome, Gareth.

GARETH COLLIER: Hi, Tumi. Thanks for having me.

BOITUMELO NTSOKO: Gareth, for some of our listeners who may be unsure, could you please explain what we refer to when we talk of a living trust?

GARETH COLLIER: A living trust – sometimes also called a discretionary trust – is set up during the lifetime of the founder or the founders. Generally, this is done for specific estate-planning goals, and what’ll happen is that the founder will set up the trust with the trustees. Once the document is set up and the trustee is in place, the founder can then start moving assets into the trust. 

This can be done in one of two ways. Either the founder can donate assets into the trust – and you’ve got to be careful that you could be subject to donations tax each year. The other way that’s typically done is those assets are sold to the trust, and if the trust doesn’t have any cash in it to begin with, it’s usually done on a loan account. Then typically those assets will be sort of donated on paper over a period of time until that loan account is settled.

Once the assets are in the trust, people need to remember that the trustees then become the custodians of those assets. 

So you’ve got to be careful that you treat those assets at arm’s length if you are a founder and a trustee. And then ultimately the named beneficiaries of the trust will be entitled to receive the benefit of those assets – be that income or maybe some distributions, depending on the nature of the assets held in the trust.

BOITUMELO NTSOKO: And what are some of the goals that one could achieve by setting up this kind of trust?

GARETH COLLIER: I think we’ve briefly touched on it there, but typically the main intention is to make sure that assets that you’ve accumulated are protected and used for the benefit of the beneficiaries of those trusts. Those could be the initial founders themselves, as well as their children and sort of family to come from there. 

Typically, you would consider this when you want to go through what’s colloquially called an estate-pegging technique. So that’s where, for argument’s sake, you’ve established a business that looks like it’s heading in a really, really good direction, and it’s going to accumulate a lot of value over time.

People may consider moving such assets or properties and things into these trust structures so that any additional growth of those assets then happens inside the trust from that point and not inside their personal estate – which makes it very efficient for succession planning because once the trust is established and the assets are inside [it], then the trust obviously doesn’t have a lifetime. That can carry on in perpetuity. 

Read:
Estate planning mechanisms that can help maximise your legacy
How to use a living trust to achieve your estate planning purposes

The other main reason people would consider setting up a trust is that if beneficiaries that they may have, and typically this would be [parties] like disabled financial dependants, be they children or maybe other family members for whom the founder is possibly financially responsible – should [the founder] pass away, those beneficiaries will probably not have the capacity to look after those assets themselves for their benefit. 

Thus using a trust can be very useful because you can transfer that sort of responsibility to trustees to look after those assets for the benefit of those disabled beneficiaries.

BOITUMELO NTSOKO: Gareth, there’s a lot of information around about how setting up a trust can help you save on tax. Is this true in practice?

GARETH COLLIER: Yes, but I think we give a heck of a lot of focus to the estate-planning reasons for the tax efficiency.

So people will tend to focus on [things] like minimising their estate duty that they could pay in their personal capacity, but then maybe don’t think of the secondary consequence – which is to look at how those assets are then taxed within the trust itself.

So, trusts are liable to be taxed at a flat rate of 45%, unless of course the trust is set up for a disabled person, in which case it’s treated as what they call a ‘special trust’.

That is then taxed on a sliding scale between 18% and 45% effectively, [where] you are in your personal capacity on the PAYE [pay as you earn income tax] tables.

Obviously the main benefit then is that once those assets are in a trust, you are no longer liable for additional estate duty or executor fees – all the other kind of costs that are typically associated with winding up an estate.

BOITUMELO NTSOKO: Earlier on, you mentioned that this kind of trust can be used for succession planning, which I think would be an attraction for a number of people. Can you just tell us more about that?

GARETH COLLIER: Let’s take [this as an example] – if you buy a family holiday home you may consider keeping that in a trust because you want not just your family and the next generation, but future generations from there to benefit from it.

So, as I mentioned earlier, you as an individual, or you and your spouse, may be the ones who initially bought it, but once you pass away you’ve got to pass it down through multiple generations – which may kind of disperse the ownership of that property. Whereas, if you establish a trust, obviously the trust entity then houses and owns the property and the beneficiaries will just change over the years but it doesn’t incur any estate-related expenses or taxes. 

Read:
The value of generational wealth planning
Protecting and transferring generational wealth

The other part, like I mentioned, is if you’ve got the likes of a business that may become well established and you would like your family and future generations to benefit from that.

Or, of course, if you’ve got other financial assets that can be held in a trust – such as your typical unit trust accounts or even nowadays the likes of your living annuity – those could possibly go into a trust if you pass away and can be used to disperse the benefits across all those beneficiaries.

Listen/read: Generational wealth: How to give your business a better chance at survival

BOITUMELO NTSOKO: You also mentioned ‘special trusts’. Can you tell us what makes them special?

GARETH COLLIER: A special trust is defined under what they call Section 6B 1 in the Income Tax Act.

That is where somebody qualifies as a disabled person. That definition means that if they are for any reason typically mentally incapable of managing their own financial affairs, that trust – if it’s set up for that specific need – can be considered a special trust. Then it gets the advantage of being taxed effectively as an individual rather than a discretionary trust.

Read:
Special trusts: Understanding their purpose and qualifying criteria
Estate planning: A special trust for your disabled child

BOITUMELO NTSOKO: Gareth, are there any barriers to forming a trust, and can you tell us what they are?

GARETH COLLIER: In terms of setting up a trust it’s quite an administratively intense process. There are obviously lawyers that are involved, and accountants that are involved. You’ve got to make sure that trust documents and deeds are drafted correctly in line with the legislation, [that] they meet all the requirements, and they’ve got to be registered with the Master’s Office. So there are a few sort of legal boxes that need to be ticked. 

And then once the trust is in place it needs to be handled almost like a business. Annual financial statements need to be completed. Income tax returns need to be completed. And when it comes to the trustees, the trustees are meant to have annual meetings.

We need to keep a record of all those resolutions that are taken care of in those meetings, and then you need to maintain an asset register of the trust as well.

So there are a few elements that need to be attended to each year, and that obviously incurs additional costs to the trust. They of course, shouldn’t be considered necessarily a reason not to do it, but we just need to be aware of those.

Listen/read: Everything you need to know when setting up a trust

BOITUMELO NTSOKO: And what are the costs involved in setting up this kind of trust?

GARETH COLLIER: Part of it, like we’ve mentioned earlier – let’s say you’ve got a business that you would like to house in the trust – one of the challenges there can be that once assets are placed in a trust they’re meant to be handled at arm’s length from the founder. If that seems to not be the case, then the term that’s used is the trust is seen to be ‘sham’. And then that veil in terms of where the trust sits can be pierced – and those [assets] could be considered part of your estate if you pass away. 

Bear in mind when it comes to estate planning, we do have the abatement in place, and the first R3.5 million of any individual’s personal estate is not liable for estate duty to begin with.

So unless your assets or your total estate is above that, you’re not going to necessarily benefit from setting up a trust – unless you have very specific goals such as a special-needs child or something like that and it would make sense to do it regardless of the size of your estate.

BOITUMELO NTSOKO: Gareth, as we wrap up, are there any closing remarks you’d like to share with our listeners?

GARETH COLLIER: I think we’ve kind of covered some of the salient points when it comes to considering a trust.

So if you are considering setting up a trust I would strongly advise that you get together with your planner to talk through the reasons why you would want to set up that trust, what you’re trying to achieve. They should then be in a position to advise you as to the pros and the cons and maybe discuss all of those. 

Read:
The advantages and disadvantages of a living trust
Setting up your living trust: A basic guide for trust founders

And if it does make sense to go through with it, typically your professional practices will probably have either in-house or external relationships with other lawyers and accountants who can help you get things established in the correct manner.

BOITUMELO NTSOKO: Thank you, Gareth, for joining us on this episode and sharing these valuable insights.

GARETH COLLIER: Only a pleasure – always lovely to be here.

BOITUMELO NTSOKO: That was Gareth Collier, who is a certified financial planner at Crue Invest.

Listen to previous Money Rules podcasts here.