Trust Tax Attorneys

With the significant complexity surrounding the various types of trusts and possible tax consequences for beneficiaries, it is often the case that trusts are inadequately utilised and that an unexpected tax implication will arise. Trusts are attractive vessels for estate and tax planning, however recent tax law changes have targeted the use of trusts and rendered them more technical and expensive for tax purposes.

2017 Trust Tax Law Change From 1 March 2017

An annual donations tax is payable on interest free / low interest loans made to trust by beneficiaries. The difference between the interest rate charged on the loan and the official interest rate as defined in the Income Tax Act (presently 8%) will be treated as a donation and subject to donations tax. Fortunately, section 7C provides some exclusions and which if carefully applied, will assist taxpayer to mitigate the effect of the new donations tax.

In tax planning, trusts are used to hold property separate from the individual’s estate so as to build wealth, mitigate tax liability, protect assets from creditors and transfer assets to the next generation at a reduced cost. This type of discretionary trust is registered and used during a person’s life time in contrast to those trusts registered upon death and utilised to administer assets on behalf of minor children.

Our team of attorneys hold specialist trust and trust tax treatment knowledge and have extensive experience in utilising trusts in a tax efficient manner. The services we offer include drafting and amending trust deeds from a tax perspective, advising on and implementing tax-law exclusions, preparing trust resolutions, certain master’s office compliance services and advising trustees on their rights and obligations in their capacity as such. We also issue opinions on the taxability of certain trust-related transactions and whether the tax will be payable in the hands of beneficiaries. Contact us to receive assistance on your trust-related issues, alternatively, to conduct a review of your trust structure and related documentation.

Some Useful Definitions

Types of Trusts

There are a number of ways how trusts types in South Africa can be classified.

This includes the following classifications:

An “ownership trust”, under which the founder or settlor transfers ownership of assets or property to a trustee(s) to be held for the benefit of defined or determinable beneficiaries of the trust.

A “bewind trust”, under which the founder or settlor transfers ownership of assets or property to beneficiaries of the trust, but control over the assets or property, is given to the trustee(s).

A “curatorship trust”, under which the trustee(s) administers the trust assets for the benefit of a beneficiary that doesn’t have the capacity to do so, for example, a curator placed in charge of a person with a disability.
Trusts can be described in various ways:

The way in which they are formed:

  • Inter vivos trust is created during the lifetime of a person
  • Mortis causa (testamentary) trust is set up in terms of the will of a person and comes into effect after their death

The rights they give beneficiaries:

  • Vesting Trust – the income (both of a revenue and capital nature) or assets of the trust are vested in the beneficiaries. The beneficiaries have the vested rights to the income or assets of the trust.
  • Discretionary Trust – the trustee(s) usually have the discretion whether to and how much of the income, assets or net trust capital of the trust to distribute to the beneficiaries. In these circumstances the beneficiaries only have contingent rights to the income, assets or net trust capital of the trust.

A combination of both vested and discretionary rights are also possible.

Trusts can be used for several purposes, for example:
Trading trusts
Asset-protection trusts
Charitable trusts
Special trusts

For tax purposes the following types of special trusts are recognised:

Special Trust Type A – a trust created solely for the benefit of a person(s) with a “disability”, as defined in section 6B(1), where the disability makes it impossible for the person(s) from earning enough money for their care or from managing their own financial matters.
Special Trust Type B – a trust created solely for the benefit of a person(s) who is a relative of the person who died and who are alive on the date of death of that deceased person (including those conceived but not yet born), and the youngest of the beneficiaries is younger than 18 years on the last day of the year of assessment.

Top Tip: The various ways of describing trusts are not mutually exclusive. For example, an Inter vivos trust can be both a Special Trust Type A and a discretionary trust; and a testamentary trust can be both a Special Trust Type B and a discretionary trust.