Setting up a trust may appear to save you on estate duties, but you should calculate the costs first, Charlene Clayton reports
Trusts are a useful vehicle for financial and estate planning but there are costs involved.
You should weigh up the financial gains of using a trust against the fee structures to assess whether a trust is a viable option.
There is no minimum asset value for a trust, but it will generally not be in your interest to establish a trust if the value of your assets is less than R100 000, because of the costs, Sean O'Hagan, head of trust services at Absa Trust, says.
Many people establish a living trust to save on estate duty. Under current legislation, you pay estate duty of 25 percent on the value of your assets that exceed R1 million.
But there may be cheaper ways of reducing the value of your estate. For example, you could donate assets to your spouse without having to pay donations tax.
However, avoiding estate duty should not be your only motive for establishing a trust, otherwise the taxman will soon be onto you. You should also remember that trusts do not avoid all tax as they are taxable entities in their own right.
The advantages of trusts include:
* Proper and continued management of your assets after you die;
* Protection of assets from creditors;
* Quick access for your family to your assets after you die and a saving on the costs of winding up your estate.
Which assets should be put into a trust
You can place any assets in a trust, although it does not make economic sense to put depreciating assets such as furniture or motor vehicles, in a trust, O'Hagan says.
Assets in your name can be placed in trust by means of a donation.
If the value of these assets is less than R25 000, or R50 000 for married couples, no donations tax is payable.
Alternatively, the assets may be lent to the trust, and the loan repaid to you by the trust with or without interest.
When you die, the outstanding amount will be added to your estate, and subject to estate duty. You may also choose to write off the loan.
You should be aware that there are costs involved in transferring assets in your name into a trust. These include:
*Fixed property:
A conveyancing (attorneys') fee and transfer duty of 10 percent of the value of the property will have to be paid. This amounts to R50 200 on a R450 000 house.
If you have a bond on the house, you will have to cancel your bond and the trust will have to take out a new bond. This will cost about R6 000 in registration costs for a loan of R450 000; and
* Shares:
You will have to pay the marketable securities tax of 0,25 percent of the value of the shares you are transferring.
New assets, which are expected to increase in value, should be acquired in the name of the trust rather than your own name, to avoid duplicating costs.
Off-the-shelf or
tailor-made trusts
There can be significant cost differences between tailor-made trusts (structured to meet your needs) and off-the-shelf trusts, Andrew Bradley, managing director of Brait Management Company, says.
A broker, for example, may make a basic trust document which is already drawn up, available to you for free, but to get a tailor-made trust drawn up could be expensive.
Bradley suggest that you make a list of four or five reasons why you want to establish a trust.
If an off-the-shelf trust cannot meet these requirements, don't make use of it and don't accept a "patch up job" on an off-the-shelf trust, he says.
The costs
The Trust Monies Protection Act merely states that the trustee is entitled to a fair and reasonable fee.
It is up to the market to determine what is fair and reasonable, O'Hagan says.
"Fees may vary considerably and you should shop around and negotiate a package that suits your particular circumstances."
But price is not the only factor to consider, he warns. You should also check the credentials of the person or institution with which you are entrusting your business. One way of to do this is to deal with a member of the Association of Trust Companies in South Africa.
You will have to pay the following costs to set up a trust and to have it administered:
* Drafting of the trust deed
These costs vary between R1 000 to R3 500, but can be up to R10 000.
* Administration/Trustee fees
* Structuring or acceptance fee:
As assets come into the trust and the trustees need to restructure the investments, you may have to pay a once-off fee of between one percent and 1,5 percent of the capital value introduced into the trust.
* Annual management fee:
From 0,4 to 1,5 percent a year on the capital value of the assets in trust.
* Collection of income fee:
This is charged annually and amounts to between five and 7,5 percent on the income collected by the trust.
* Capital distribution or termination fee:
Often companies charge this fee to lock you in to making use of their services, O'Hagan says. It ranges from one to two percent on the capital value of the assets distributed. It may also be charged on partial termination of the trust.
Watch out for companies that charge you a capital distribution or termination fee, which may also be charged on partial termination of a trust.
This is often done to lock you into making use of their services and the fee can range from one to two percent of the capital value of the assets which are distributed.
You should check on this before you have a trust drawn up and administered.
A trust is an agreement between a founder and the trustees. It involves the founder transferring assets to the trustees to administer for the benefit of beneficiaries.
Founder: Also known as the settlor or donor. This is the person who makes the initial donation to the trustee(s) with the intention of creating a trust.
Trustees: These are the people (and there are usually more than one) who are nominated by the founder as the legal owners of the assets held by the trust. They are responsible for the administration of the trust according to the terms and conditions in the trust deed.
Trust Deed: A written record of the agreement between the founder and the trustees.
Beneficiary: A person who benefits from the trust's assets, whether this is from income or from the capital.
There are two types of trusts: testamentary (will) trusts or inter vivos (living) trusts.
A will trust comes into being in terms of your will when you die. It is usually established because it allows for better management and control of assets. It also provides for the financial protection of beneficiaries, such as minor children or other dependents who may not be capable of rational decisions.
A living trust is established during your lifetime.