If your sole objective in forming a trust is to obtain a tax benefit, then you are likely to be disappointed at some point in the future, says Hilary Dudley, managing director of Citadel Fiduciary.
"It has become much more expensive to hold assets within a trust, and there are less tax planning opportunities now than during the 1970s, when trusts were not even subject to tax," she notes.
The main change in the taxation of trusts in recent years was the introduction of Section 7C of the Income Tax Act, which came into effect from March 1, 2017. This section applies the official rate of interest to low-interest or interest-free loans made to trusts. According to Dudley, this was likely implemented in order to make it more expensive for individuals to transfer assets to trusts.
"From a tax point of view, this legislation has made it more costly to fund a trust by means of a loan account. However, it should be noted that this is not the only way to fund a trust," says Dudley.
"Trusts still have an important role to play within estate planning if they are formed for the right reasons, offering benefits such as asset protection and continuity."
She points out that there are many issues to take into account before making the decision to form a new trust or to terminate an existing one.
"This is especially relevant if you or your heirs are planning on emigrating to another country, as tax residence and exchange control issues would become particularly important," says Dudley.
She adds that the only other major change implemented in recent times is the introduction of a stepped rate of estate duty and donations tax. From March 1, 2018, the value of estates and donations above R30m are taxed at 25% rather than 20%.
"The introduction of a stepped rate of estate duty perhaps strengthens the argument for the use of trusts in estate planning, particularly where multi-generational assets such as farms or holiday homes are involved," she explains.
Additionally, situs tax (a death tax levied on assets located in countries such as the UK and US) further raises the value of trusts in estate planning, in her view. The situs tax applies even when the assets are owned by non-residents of that country.
Although there are rules in place to prevent paying tax on the same assets twice (double tax), an issue may arise if the tax in the foreign country is levied at a higher rate than in South Africa.
"Given the exchange control restrictions on holding direct offshore investments in local trusts, South Africans may consider the use of offshore trusts to achieve the same estate planning objectives," says Dudley.