Jan Dawid Luttig, Fiduciary Specialist, Citadel
While much has been made of the proposals contained in the first interim report of the Davis Tax Committee on estate duty, particularly those related to trusts, as well as in this year’s Budget Speech, these structures remain viable and useful instruments.
The proposed changes aim, among other things, to close tax loopholes that had been exploited to minimise estate duties. The Davis Tax Committee’s brief had been to review the current tax policy framework and its role in supporting inclusive growth, employment, development and fiscal sustainability.
In a word, that means improving the state’s tax revenues. So trusts have become a natural target as some have been used to reduce the amount of tax paid.
Despite this, trusts still play an important role for families and individuals who have wealth they wish to preserve for future generations. This is typically achieved by transferring assets such as properties, share portfolios and even cash into a trust. This practice, where loan accounts can be created as a result of such transfers, should however be considered carefully in view of the recent remarks by the Minister of Finance during the Budget Speech, which allude to a possible future discouragement to transfer assets by way of loan account.
The benefit of such careful consideration is that any decision on the disposal of assets rests with the trustees, thereby removing emotion from the equation. This level of governance and prudent asset management is also suitable for individuals in the process of accumulating wealth or building a large estate. An added benefit is that of asset protection. If a trust is managed correctly, then the trust assets are normally ring-fenced against the personal liabilities of a family and its members.
Trusts also remain the ideal vehicle through which to preserve wealth. The proposed tax changes will effectively close the gap between individual and trust tax rates, so there will be no advantage in moving assets or income into or out of the trust to maximise the tax benefit. But the oversight provided by trustees remains the most valuable tool in ensuring that value is not destroyed through mismanagement or avarice. Since a trust cannot “die” the smooth continuity of the management of the assets in a trust, despite a family member’s death, is an added advantage.
A further reason to set up a trust that also draws on the trustees as, ideally, independent parties tasked with ensuring sensible management of the assets, is to avoid value destruction as a result of family feuds. This could be the unpleasant result of divorce or disharmony between siblings, or even siblings and parents.
The final purpose that a trust still fulfils is to provide for dependents with special needs. Special Trusts can be set up for this purpose and they hold the added advantage of favourable tax rates to ensure that the future needs of such dependents can be met.
Even though the final recommendations from the Davis Tax Committee are still awaited and would thereafter have to be passed into law, and even though the legal implementation of the Budget’s recommendations is not finalized yet, the general trend in terms of tax treatment of trusts confirms our view that trusts should not primarily be used as tax-avoidance instruments.
Fortunately the positive benefits that these structures offer have not been eroded and should continue to form part of any estate and succession planning undertaken by individuals and families.