If your sole goal in forming a trust is to get a tax break, you'll probably be disappointed at some point, says Hilary Dudley, CEO of Citadel Fiduciary.
"It has become much more expensive to hold assets in a trust, and there are fewer possibilities for tax planning than in the 1970s, when trusts were not even taxable," she notes.
The main change in the taxation of trusts in recent years has been the introduction of Section 7C of the Income Tax Act, which came into force on 1 March 2017. In this section, the official interest rate is applied to low-interest or interest-free loans to trusts. This was probably implemented, according to Dudley, to make the transfer of assets to trusts more expensive for individuals.
"From a tax perspective, it has made this legislation more expensive to fund a trust through a loan, but it should be noted that this is not the only way to fund a trust," says Dudley.
"Trusts continue to play an important role in estate planning if they are founded for the right reasons and provide benefits such as asset protection and continuity."
She points out that before deciding to establish a new foundation or terminate an existing one, many aspects have to be considered.
"This is particularly relevant if you or your heirs intend to emigrate to another country, as tax residence and foreign exchange control issues would become particularly important," says Dudley. As of 1 March 2018, the value of rebates and donations of more than R 30 million will no longer be taxed at 20%, but at 25%.
"The introduction of a tiered estate tax rate may reinforce the argument for using trust funds in estate planning, especially when dealing with multi-generational assets such as farms or holiday homes," she explains.
In addition, the situs tax (a death tax levied on assets in countries such as the United Kingdom and the US) increases the value of trusts in estate planning, in their view. The Situs tax applies even if the property is owned by non-residents of that country.
Although there are regulations that prevent tax on the same assets being levied twice (double taxation), problems can arise if the taxes on foreign taxes are higher than in South Africa.
"Given foreign exchange control restrictions on offshore FDI in local trusts, South Africans might consider using offshore trusts to achieve the same estate planning goals," says Dr. Dudley.