Misused Trusts
Jim Millar Financial Fitness
Posted Tue, 06 Aug 2002
Many private investors have learned about the benefits of forming a living trust and have incurred the expense of setting one up. Unfortunately, the good intentions ended there. Living trusts offer numerous estate planning benefits such as avoiding the executorship process, reducing estate duty, protection against certain lawsuits and the original attraction — effective tax planning.
In many cases, however, the trusts have been formed, legal fees paid and the major assets of the trustees are still registered in their personal names.
This renders the trust a complete waste of money, which is such a pity considering the huge benefits it can bestow. So, if you have previously been smart enough to establish a living trust, you now need to finish the job.
Here are the questions you need to consider:
Why was the trust established?
Many people think that they want a trust to pass on the benefit of their labours to their children. Then the focus
changes and they look for the best ways to reduce personal income tax or protect their assets from business liabilities. It is critical to understand why you wanted a trust and become steadfast on the correct path toward those benefits.
Whom do you wish to benefit from the assets of the trust?
The beneficiaries of a family living trust are generally your spouse, your children and yourself. If circumstances have changed significantly since the formation of your trust, this highly important section should be carefully reviewed.
Which assets should belong to the trust?
Your living trust should own assets that are likely to appreciate in value or those things that you could not afford to live without. Due to the R1-million Capital Gains Tax exemption on your primary residence you should not transfer your family home into the trust unless you are a business owner. Business owners are often wise to accept the CGT exposure in exchange for protection of
their primary residence. Other assets, like investment accounts, second properties and collectables, should be transferred to the trust with loan accounts registered in your name for their net value.
How do you transfer the assets from your name to the trust?
In the case of investment accounts it simply is a matter of establishing an account in the name of the trust with you as the trustee. If this account is set up with the financial institution that you are currently dealing with, investment need not be sold but simply transferred from the old account to the new one. For fixed property, such as your holiday home it would be wise to consider how much longer you intend keeping it before paying transfer duties. Future fixed property purchases can be made in private company structures that, in turn, belong to your living trust.
There are many benefits to using your living trust. You have taken the trouble to set it up, now take the remaining few steps to transfer the appropriate assets into it. Then find a good trust accountant to keep the records straight.
By Jim Millar Financial Fitness Consulting 011 883-6683.
