Myths about trusts

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1. Trusts do not serve a purpose until you have created wealth

The truth is that the wealthy have set up their trusts before they become wealthy. The vehicle you choose to create and protect your wealth in, is an indespensable way for you to achieve your financial freedom goals. It has to be put in place before any wealth is created, as subsequent changes in the structure will cause major tax and other consequenses and you will be exposed to risk until such time as you move your assets into a trust. You will be compromised should anything happen before you have put the structures in place  (death or attack from creditors) or wealth have already accumulated in your own hands by the time you believe you should transfer it into a trust.

2. Trusts have the worst tax rate

This is only partially true. Only if the trustees decide to retain all the profits and not distribute it to the beneficiaries, will the trust be taxed at the 45% tax rate on income. The conduit principle, however allows trustees to shift the tax burden from a trust to beneficiaries and therefore paying tax at the individual’s marginal tax rate, which may in many instances be lower than the trust tax rate of 45%. You can therefore legally be making use of this mechanism and achieve an even better tax efficiency than what you would have achieved in your personal capacity. This makes it possible to do tax planning from time to time.

3. Trusts are expensive

Trusts do cost money to set up, but it may be “penny wise, pound foolish”, as it may “cost” you more by not having a trust. The cost of estate duty, capital gains tax, executor’s fees and income tax can be very expensive, if you do not take advantage of setting up a trust. A correctly structured trust is also a lot more economical and cost effective than running a company or close corporation.

4. You lose control over your assets if it is owned by a trust

Trustees control the affairs of the trust, so you will have to pay careful attention when you select trustees. There are ways to structure a trust so that you do not feel that you are giving up full control over your assets  – you can be the founder, one of the trustees and a beneficiary of the trust and still satisfy SARS, other creditors and the Master of the High Court of the legitimacy and lawfulness of the trust. An independent trustee typically gives comfort to SARS, other creditors and the Master of the High Court, whilst assisting you to not lose control over your assets, through the way the trust is set up.

 5. SARS are investigating trusts

Trusts have been used for almost a thousand years internationally. Trusts will be investigated by SARS if they are brutally misused and mismanaged. If a trust is correctly structured and administered in accordance with the trust deed, the Trust Property Control Act, 57 of 1988 that governs trusts in South Africa, and other relevant laws, SARS will have no leg to stand on.