[Question] Holding Company Shares Through Trust vs. Personal Capacity

[davidbann]

Hi there,

We are currently negotiating some business shareholding deals in PTY companies. I have been advised by some that I should rather hold the shares in a trust instead of my personal capacity, and then others have told me that it's more trouble than it's worth. I understand that trusts are taxed at 40%, but apparently there might be tax benefits or something?

Please could you explain the pro's and con's of holding shares through a trust instead of in personal capacity?

Thanks
David

[Dave A]

The advantages of inter vivos trusts are:

• They can be used to compartmentalise and separate assets from risks
• They can give some flexibility in terms of directing distributions to beneficiaries
• They are a powerful tool in estate planning, succession and continuity - and as they don't die, do not attract estate duty
• There is minimal statutory legislation in place to comply with relative to other forms of juristic persona.

Disadvantages:

• You need to involve at least one other person as an independent trustee
• A business with a trust as shareholder will not be able to take advantage of Small Business Corporation tax breaks or Turnover tax (assuming it would otherwise qualify)
• It's another set of books to maintain
• All decisions need to be diligently recorded
• Virtually all forms of income will be taxed at exorbitant rates from the first Rand unless you apply the flow-through principle
• There is an ever increasing administrative burden and cost being brought by regulatory changes
• A very negative attitude towards inter vivos trusts by SARS in particular is making the future regulatory environment for these trusts uncertain.

It's also worth noting that the separation and protection of trustees and beneficiaries from being personally held liable by litigants is steadily being eroded, much like with directors and shareholders in incorporated juristic persons.

[davidbann]

Thanks Dave - that's very insightful!

I get the impression that you would personally steer clear of inter vivos trusts? Are there any particular circumstances where you would deem it fit to seriously consider using one? i.e. if restructuring shares of a small business with huge growth plans..?

Cheers

[CLIVE-TRIANGLE]

but apparently there might be tax benefits or something?

Please could you explain the pro's and con's of holding shares through a trust instead of in personal capacity?

Thanks
David

There are no tax benefits.

Other than if you personally risk being sequestrated, a trust protects your shares from an imaginary risk.

If you think that your estate will one day attract considerable duty, then do it. Otherwise it is rather pointless and will merely be burdensome.

Did the proponents offer any reasons why they felt it to be the way to go?

[mobilesitehelper]

Hi I agree with Dave A, as I previously looked into the issue of trusts, and I think you have to look into what your risks may be. From what I believe is that Trusts can very made to be very flexable.

Andrew

[Dave A]

I get the impression that you would personally steer clear of inter vivos trusts?

They don't bring as much to the table as they used to, and I can see the situation deteriorating even further going forward.

Are there any particular circumstances where you would deem it fit to seriously consider using one? i.e. if restructuring shares of a small business with huge growth plans..?

I'd personally wait until the business is out of the "small" stage, but please don't take that as a golden rule. Everybody's circumstances are different and you may well have a situation where it'd be a good option.

Just look damn carefully before you leap.

[Justloadit]

Moving shares to a trust at a later stage may also have some problems in that the trust owns an asset and had no capital to purchase the shares, creating a loan. One way of clearing the loan is by using the donations into the trust, which it then uses to settle the loan. This is OK for small amounts, but if the shares have a huge financial value, it could take decades to reduce the loan with the donations process.

Best to speak to a Trust attorney.

[Justloadit]

Another thought, with the transfer of shares, there may be CGT involved, if the share value has appreciated with increased value of the comapny.