Investec Bank Trust Account

When managing the effects of inheritance tax on your estate, trusts can help you protect your assets for the benefit of your loved ones.

Independent, expert adviceIf you are thinking about how to protect and pass on your wealth and assets, a trust can be a cornerstone of your estate planning. Trusts can be complex structures. Our expert financial planners are here to discuss the best options for you and your estate.
Greater control of your assetsA trust gives you greater control of what happens with your hard-earned wealth after you’ve passed away. With a trust, you can protect your assets and manage tax liabilities on behalf of the people important to you.
Decide who benefits and whenYou can choose to set up a trust upon your death or during your lifetime. If you do this during your lifetime, you can influence who manages the trust, who benefits from it, and when.
Paying off an inheritance tax billYou can also use a trust in conjunction with a life assurance policy to create a lump sum that your beneficiaries can use to pay an inheritance tax bill.

‘Trusts are an area often misunderstood, but the combination of protection and tax savings they offer makes them incredibly beneficial.’

Chris Aitken, Head of Financial Planning, Investec Wealth & Investment

Help with choosing the right trust

To make sure you select the right type of trust for your needs and goals, our specialist estate planners can discuss different options with you. These include:

Bespoke trusts: designed especially for you and your estate.
Packaged trusts: these are provided by insurance companies, but chosen by us with you in mind.
Specific trusts: such as loan trusts and discounted gift trusts.

Trusts allow for assets to be split between family members and are an efficient way to house complex assets. They also offer protection from creditors. Assets that belong to a trust are also not subject to executors’ fees, which can amount to up to 3.5% plus VAT on the gross value of your estate.

On the tax front, trusts still have their benefits, even if these benefits have whittled away over the years.

Interest-free loans to trusts were one of the most tax-efficient ways to fund trusts. An interest-free loan would be made to a trust, and the loan proceeds would then be invested in the trust. This had the effect of pegging the value of the founder’s estate to the value of the loan. The growth would be in the trust and it would not be subject to estate duties. The result: reduced estate duties on death.

Is the juice worth the squeeze?

The estate duty saving still rings true today, especially for assets which have a high growth potential, such as new start-up businesses that can be established at a low cost, but that have great potential to grow. However, the new section 7C – which now requires all loans to trusts (or their underlying companies) to be interest-bearing at the official rate of interest (and where if no interest is charged, the interest foregone is taxed as a donation) – means that this benefit now comes at a higher tax cost. It is now a number-crunching exercise to determine if the “juice is worth the squeeze”.

Assets can be distributed and passed to the next generation without donations tax being paid. In addition, the conduit principle allows income and capital gains generated in a trust to be taxed at an individual’s tax rate, which is generally lower than the rate at which a trust is taxed. There have been murmurings that SARS is looking at abolishing this principle, which would mean all income and capital gains would be taxed in the trust at the trust marginal tax rate.

Offshore trusts, if structured correctly, can still be extremely efficient from a tax perspective, as the actual trust itself would not be subject to tax if the trust is administered in a low or no tax jurisdiction (as is the case with local trusts). However, most services that come with a foreign currency invoice are expensive. An offshore trust is not a cheap vehicle to administer.

Termination considerations

Terminating an existing local and offshore trust also carries a tax and administrative cost. When a trust disposes of an asset to a beneficiary, it’s considered a disposal for capital gains tax purposes and could trigger a taxable capital gain. Any asset (along with its growth) that is distributed to a beneficiary would now fall into the beneficiary’s estate for estate duty purposes.

What to think about before terminating a trust

If you’re considering terminating your trust, you should ‘crunch the numbers’ and also think about:

The jurisdiction of the trust
The tax and administration costs of terminating the trust
The tax benefits and estate duty savings the trust provides, versus the new section 7C tax cost it carries
The commercial and emotional rationale for having a trust, which includes the significant benefits of the preservation of family wealth.

“Should I keep my trust?” may seem like a straightforward question, but it doesn’t, unfortunately, have a straightforward answer. The decision and answer depend on the unique circumstance and dynamics of each family.