A TRUST is it a contentious subject. I had one of my clients asking me about the differences between a Trust and a company. His scenario was a bit different because there was a Non-profit Organization in this scenario. This raises questions about setting up Trusts, the advantages and disadvantages and costs as well.

The most common trust that most people set up is a family trust.

A family trust is a trust created by a founder to shift the holding of assets to trustees (someone you trust) for the advantage of the beneficiaries (your family members). A family trust is a category of Inter Vivos (living) trust created and carried out while living.

You can choose to either make your family trust revocable or irrevocable. When a family trust is revocable, you can be a trustee and modify the trustee as you please. It also means you can alter the terms of service in the trust deeds you want. A revocable trust also allows you to annul the trust completely.

However, an irrevocable family trust is the opposite of a revocable one. An irrevocable family trust cannot be altered once it has been created. Also, you cannot be a trustee of an irrevocable family trust, and you must nominate a trustee apart from yourself. The terms of service in a trust deed of an irrevocable trust cannot be modified, nor can it be annulled completely.

But what is the difference between a Trust and a Company?

Setting up a company and the tax implications

• A company set up is simple enough, however the company will need to be registered with CIPC. Annual returns need to be filled with CIPC together with annual fee for continued registration
• Shareholders have limited liability meaning that should the company become insolvent, creditors can’t claim from the shareholders in their personal capacity
• Business income and expenses will be declared on the Company’s tax return. The Company must be registered with SARS as an income taxpayer (the company is normally automatically registered for income tax when the company is registered) & as a provisional taxpayer.
Therefore, there will be 3 tax returns due per tax year on which tax may be payable. This includes the 2 Provisional tax returns during the tax year (estimate figures) and the final annual tax return after the tax period (final figures).
• Company needs to file a Company Tax Return (ITR14) in its own capacity. Dividends tax is paid by the company and levied at 20% on distributions to shareholders
• Financial statements need to be compiled by an Accounting Officer and submitted to SARS when ITR14 is filed
• Company must register as an “employer” with SARS and a director’s salary is subject to PAYE deductions.
• Requirement to register for VAT when turnover for a twelve-month period is R1m or more.

Housing the business in the family trust.
Trust between living persons (inter vivos trusts) is created by and between living persons through an agreement, for example a family trust or an employee share ownership trust

Advantages of Trusts
• Estate duty – Trust plays a role in Estate planning. A living trust allows you to grow your assets by purchasing property, increasing your share portfolio etc. thus reducing the estate duty and other tax liabilities. This increases your loan account in the Trust but this loan account can be
reduced by the amounts of donations vested into the Trust. Bearing in mind, the donations in limited to R100,000 per year. Donations in excess of the R100,000 will incur donations tax.
• Asset Protection – your assets can be protected in a trust, and you can grow this. There is protection against creditors, however, the loan in the Trust account would be an asset in your personal account. This asset can be attacked by creditors. Only if this loan in the Trust is reduced, will there be a benefit.
• Flexibility – there is more flexibility in terms of having a trust and providing to the beneficiaries without ownership transfer

Disadvantages
• Loss of control as you as the founder transfers assets to the trust. You no longer have control over those assets
• Administration costs of setting up a trust etc.
• Appointing the wrong trustees can be detrimental. The trustees need to have the best interests of the beneficiaries in mind.
• If you intend to sell assets to the trust and then use your annual donations tax exemption to reduce your loan account over time it is important to remember that you can only reduce this loan account by R100 000 per year without incurring any additional donations taxes. It is also
important to bear in mind that the sale of the asset will trigger a capital gains event and you may be liable for CGT when the sale takes place. Further, as the value of your loan account will reduce over time as and when you use your donations tax exemption, there may still be estate
duty implications in your deceased estate should you pass away prior to the loan being paid off.

Tax implication of a trust
• Trusts are taxed at 45%.
• The distributions that are paid to the beneficiaries are taxed in the hands of the beneficiaries.

I know there is still a lot more to write about regarding Trusts but this is just a start. D Squared Solutions can compile your Financials for your trust, please see the website, Services – D Squared Solutions

Have a wonderful day