Trust tax question

[Imp]

Hi
I am updating my tax knowledge and i have in the past completely avoided trust accounting / tax but its time .....

My question is :

If a parent donates assets to a trust relating to a minor i know the parent gets taxed on the income. If the Grandparent donates or infact anyone else on behalf of the minor then the minor gets taxed in their own right. But can a minor submit a tax return or would it be added to the parents tax return?

Please help

[CLIVE-TRIANGLE]

In the first instance, beneficiaries only get taxed on distributions, if at all.
The trust, on the other hand, is a taxpayer and is taxed on it's profits, if any.
Donations are exempt in the hands of a trust and do not form part of it's taxable profits.
Donors to trusts are taxed (donations tax) only when the donations tax limits are exceeded.

In your question:
The parent (or anybody else for that matter) is liable to pay donations tax if their donations exceeded the annual limit. There is no impact on the beneficiary.

[AmithS]

Interesting, how much is donations tax and what is the threshold?

[CLIVE-TRIANGLE]

It's easiest to quote SARS here:

Donations tax is tax payable on the value of property disposed of by a resident by means of a donation.
What is the rate?

Donations tax is levied at a flat rate of 20% on the value of the property donated.

Donors as individuals

In terms of section 56(2) of the Income Tax Act - Donations tax shall not be payable in respect of so much of the sum of the values of all property disposed of under donations by a donor who is a natural person as does not during any year of assessment exceed R100 000. This came into operation from 2007/03/01 and is applicable in respect of any year of assessment commencing on or after that date.

Donors other than individuals

For juristic persons such as private companies, the exemption is limited to R10 000 in respect of casual gifts. Public companies are exempt from donations tax.

Donations to public-benefit organisations

These donations are exempt from tax.

When is a disposal considered a donation?

If any property has been disposed of for a consideration that, in the opinion of the Commissioner, is not an adequate consideration, that property is treated as having been disposed of by donation. The donor is liable for the payment of the donations tax. If the donor fails to pay the tax within the prescribed period, the donor and the donee are jointly and severally liable for the tax.

[Imp]

I am reading that Trusts used to be a very tax efficient way of receiving income and allocating to minors or spouses subject to lower tax rates but with the introduction of section 7 alot of these loopholes have been closed up. I was then wondering, is a Trust still worthwhile?

[Justloadit]

The Trust is a vehicle to protect assets.
This is like insurance and will draw a cost. The decision you must make - is it worth while for me to maintain a Trust.
If you are in business, and you have signed sureties, then you have no choice but to ensure that you have a Trust as a protection mechanism when the business goes bad. Under the current financial melt down, how many businesses have not gone under, taking the family with it.

[AmithS]

How does a trust provide protection of assets?

[Justloadit]

The trust owns the assets, and not you personally. Then the Trust allows you to use the assets. No one can take ownership of the asset if you owe them money, because the asset does not belong to you, but to the Trust.

There is some legal issues you must deal with in the Trust, to ensure that you are not seen as using the Trusts assets as if they are your own. You need an independent trustee, and all decisions must be minuted and approved by the Trustees. Make no mistake, you as a trustee are held personally responsible for the operation of the trust, as the beneficiaries have entrusted you to look after them.

I suggest you contact a Trust attorney to find out the pros and cons of having a trust.

Ensure the attorney you visit is effluent in the Trust laws, as he will have to defend the trust at some time or other if it comes under attack.

[AmithS]

So, lets take this example.

I have some assets that I want to protect in a trust.

Will I be a beneficiary to the trust? and will the e.g. attorney be the trustee?

If this is the case how am I still the owner of the assets? as the trustee is the main controller of the assets correct?

[Imp]

If you have property that you wish to transfer to a trust (or a company for that matter) would you pay transfer duty on it?

[CLIVE-TRIANGLE]

So, lets take this example.

I have some assets that I want to protect in a trust.

Will I be a beneficiary to the trust? and will the e.g. attorney be the trustee?

If this is the case how am I still the owner of the assets? as the trustee is the main controller of the assets correct?

As a minimum you would have an independent trustee, plus two (frequently husband and wife).
Husband and wife and children are the beneficiaries.
The trustees manage the assets (and business) of the trust strictly and solely for the benefit of trustees.
(The last line is where most trusts fail..)

Follow JustLoadit's advice.

It is basically correct that the assets of a trust cannot be attached by a creditor of a beneficiary. However be aware that the income that accrues to a beneficiary from the assets can be attached. As an example, if the trust owns property that it lets and beneficiary A is in trouble, the creditor can claim that beneficiary's share of that income. Similarly, if the asset is sold by the trust, the distribution to A can be attached.

There are other considerations also, and to my mind the most critical are:
- the location of the independent trustee
- ensuring continuity - who will replace a deceased trustee?

[CLIVE-TRIANGLE]

If you have property that you wish to transfer to a trust (or a company for that matter) would you pay transfer duty on it?

If it would normally attract duty, then yes.
Also bear in mind the donations tax issue.

[Imp]

Thanks guys very helpful info.

[Basment Dweller]

I am currently setting up a family trust and I am receiving conflicting advice about whether to appoint one to our board.

One side say that the independent trustee is important to keep the trust impartial and not a sham or alter ego.

The other side claims the the independent trustee is a big pain in the ass and can hinder the business process as he has to validate trust decisions.

Do any of you guys have experience with independent trustees?

[Justloadit]

The whole point of a trust is to maintain integrity of assets, with out an independent trustee, this will be seen as you simply trading using the trust as a vehicle, and by so doing it means that the trust no longer offers the protection it is meant to have.
The whole point of an independent trustee is to ensure that all decisions made by the trustees follow the original mandate set up in the trust, and to protect the beneficiaries of the trust, and are not there to satisfy one of the trustees or all of the trustee.
Any trust which does not have an independent trustee will be seen as any other type of business structure.

I would think that a trust would need a minimum of 2 trustees, one of them being the independant.

I suggest that you contact an attorney who specializes in this field, to make sure that the trust is set up to protect what the original intention was for. There are 2 that I know of in Johannesburg, Rob Velosa and Bizfin, both in Randburg.