Asset transfer – some legal background on trusts and close companies
A trust, often known as a corporation, is a legal ‘person’ that can own assets and receive income. In this situation, the brothers own the CC, which owns the property. The renters pay the CC rent, which is used to pay expenses before the profit is divided to the owners in proportion to their ownership percentage. This is referred to as a dividend.
Moving assets – what if the property were owned by a trust, not a CC?
If the property was owned by a trust, the situation would be similar. Profits distributed through a trust are normally taxed in the hands of whoever receives them, which means you can wind up paying less tax if you distribute the profits to each member of the family rather than just one beneficiary. Direct ownership of the property by a trust would be more efficient under current legislation than ownership through a CC, but proposed tax law amendments announced by the Minister of Finance in his Budget statement in February may result in little difference between the two in the future.
What’s the difference between a CC and a trust?
- No one can ‘own’ a trust: this is the primary distinction between a credit card and a trust. You can form a trust (by being the founder), control a trust (by becoming a trustee), and benefit from trust revenue (as a beneficiary).
- A trust is not part of a deceased estate: Because a trust is not something you own, it does not pass into your estate when you die. As a result, it can continue to operate in accordance with the trust deed even after your death. In contrast, a CC is an asset in your inheritance that must be sold or transferred to your heirs.
Should this family property be held in trust?
Yes, because the brothers’ principal goal is to provide income and a legacy to the family, a trust is the right vehicle for the scenario because it ‘lives’ beyond the lifespan of the founding beneficiaries. In fact, if they had utilized a trust instead of a CC in the start, they might have already saved some tax. Furthermore, the expense of administering a trust should be comparable to that of running a CC, so there are no unexpected shocks.
What issues should be considered when establishing a trust?
A trust can cost anything between R4,000 and R12,000. The wording of the trust deed must be carefully considered since you want to ensure that the trust is both tax effective and that your family will continue to profit after you die.
Consider how the trust should be managed when all of the brothers have died. When the revenue from a trust is divided among multiple second-generation beneficiaries, conflict can occur as different family members vie for control.
Transferring assets from the CC to the trust
The difficulty with transferring assets from an existing CC to a trust is that you will incur capital gains tax and transfer duties. There will also be VAT issues to consider. There are three alternatives to consider.
Option one is to sell the CC’s assets to a trust and then close the CC.
Option two would be to transfer the CC’s ownership to a trust and keep both running. You should discuss this with your accountant, who will be able to tell you the costs and benefits of each choice. While option two is likely to be less expensive in terms of taxes, it will be more expensive to operate because you will have two organizations.
Option three is for the brothers to sign into a buy-and-sell arrangement, which would be backed up by buy-and-sell insurance on each other’s lives. This has the effect of distributing the value of any deceased member’s share to his family, leaving the surviving two as the sole owners.
