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Can a trust really help you protect your generational wealth?

by , 10 May 2016
Can a trust really help you protect your generational wealth?
To find out if trusts can help you protect your family's financial situation after you're gone, Aiden Sookdin spoke to one of the foremost trust experts in South Africa, Albert Vorster, Senior Fiduciary Specialist at Momentum Trust Limited. Here's what you need to know...

Albert agrees that trusts are still relevant for effective estate planning, asset protection and generational continuity planning strategies.

Albert explains, “A trust is a separate legal entity but not a legal persona or a juristic person in the strict sense of the word. A trust is a contract. Once the parties involved in the trust sign a contract, the Master of the High Court then registers it and allocates the newly formed trust with a registration number.”
A trust is by no means a juristic person like a Close Corporation or a company. Instead, a trust is a legal relationship created by a person (the founder) who puts assets under the control of another person (the trustee).
If you, as the founder of a trust, create this trust while you're alive, it becomes an Inter Vivos Trust. That means, if you die, your assets outlined in your Will go into a Testamentary Trust for your beneficiaries (children).

Three important reasons why you should consider a trust

Let’s take a closer look at the benefits of a trust and how this applies to the wealth you’re generating right now.

1. Asset Protection – Separate your assets from your business rights

If you have your own business or property investments then you might want to pay attention.
One of the most important reasons why you should consider a trust is because it can help you separate your assets from you property investment debt and your business interests.
Why is this separation so important?
Well, some of the risks business owners experience includes potential claims for financial damages from creditors, employees, tenants, customers and even competitors. Now even though you might not have been directly responsible for the incident that led to the claim against your business or property investment, your personal assets could be used to settle the claim against your property investment or business.
2. Die peacefully, knowing your family’s wealth is protected
When you die, estate duty is paid on the net value of all the assets in excess of the abatement amount. The Estate Duty Act stipulates that only a portion of your personal estate is free of any duties.
Alberts says, “Estate duty will be applicable at a rate of 20% of your net estate in excess of R3,5 million. R3,5 million seems like a generous abatement but it’s important to remember that deemed assets (such as the proceeds as life policies, even if paid to third parties) would also be included in your estate for calculation of estate duty and the abatement amount is soon exceeded.”
This means that all assets in your estate exceeding R3.5 million are taxed at 20%. This amount will be paid to SARS by your beneficiaries who would then have to sell your assets to settle the bill.
The solution to this scary scenario is simple – establish a trust. On your death, zero estate duty will be payable as these assets no longer form part of your personal estate.

3. Nothing is certain but death and taxes – Unless you have a trust

Capital Gains Tax (CGT) is paid when you sell one of your assets and make a profit. When you die, you are technically disposing your total estate at market value.
Albert says, “The payment of CGT could place the estate under financial pressure. In many instances, CGT on death could be an even worse tax/duty than estate duty! By securing your assets in a trust this will be avoided as the assets will again not form part of your personal estate on death.”
So, if you want to leave your children with a legacy of financial knowledge and wealth, a trust is the perfect medium to achieve this. The only challenge you’ll have is to make sure that your children have the financial knowledge to use the money in the trust responsibly and to the benefit of future generations.

Can a trust really help you protect your generational wealth?
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