Know Your Money with Bronwyn Waner and Craig Finch
Know Your Money with Bronwyn Waner and Craig Finch
117. The Strategic Benefits of Trusts
Demystifying trusts as practical financial planning tools is the focus of our enlightening conversation with Marteen from Fidelis Vox, whose very name means "Trusted Voice." Moving beyond outdated perceptions of trusts as tax avoidance vehicles, we uncover their strategic applications for both business owners and families.
Marteen walks us through fundamental trust concepts, explaining how these entities provide critical asset protection for business owners against potential creditors while ensuring business continuity after death. The structure avoids estate freezing, excessive executor fees, and potential family conflicts during estate administration – increasingly valuable benefits given South Africa's current delays in estate processing.
The conversation explores practical scenarios where trusts make sense: protecting assets for financially vulnerable family members, housing shared family vacation properties, and structuring business interests. We also address common misconceptions, discussing the requirement for independent trustees, the implications of housing primary residences in trusts, and the current regulations regarding loan accounts to trusts.
For families considering wealth protection strategies, Marteen highlights testamentary trusts as cost-effective alternatives that activate only upon death, providing protection for minor children without incurring ongoing administration expenses during your lifetime. She emphasizes that proper trust management is essential to maintain their legal protections and prevent them from being deemed alter egos of their founders.
Whether you're a business owner seeking asset protection, a parent planning for your children's financial security, or a family wanting to preserve shared assets across generations, this episode provides practical insights to help determine if a trust structure aligns with your specific circumstances. Subscribe to Know Your Money for more expert conversations on protecting and growing your wealth.
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Hello everybody, welcome to Know your Money. I'm Bronwyn Wehner.
Speaker 2:And I'm Craig Finch, and we are from Growth Financial Planning. We hope you enjoy our podcast.
Speaker 1:Today we have Martine from Fidelis Fox to come and talk a little bit about Trusts. Martine, would you like to introduce yourself?
Speaker 3:Thank you, bronwyn. Yes, I am one of the founders and directors of Fidelis Fox. It is the Fadushi specialist business. The name means Trusted Voice. We do specialise in all Fadushi matters wealth estate planning, trusts, structuring, tax advice, deceased estates, local and abroad, cross-border.
Speaker 2:Awesome. So we're going to talk about trust today, martine. So in my years experience in the 90s, I think, or around the 90s, 2000s there were a lot of trust forms. So you'd have a trust for your furniture, a trust for your car, a trust for your house. There was a person doing a lot of that work in Joburg, and so I've got a negative connotation about a trust.
Speaker 2:I'm thinking why do you have this? It's an expensive structure, so why would you really have it? And my view is you'd have it in. If you have maybe a business that could go insolvent let's say you're trading steel with some and you're doing large volumes and you have a deal go bad then maybe you would consider housing your assets in a trust, not putting your house in a trust. So I think, okay, that's a good reason. And the other reason was I own the Lego agency or I've got a piece of farmland that I'd like to have that continue for my family and I put that in a trust to make sure there's continuity. So am I wrong in thinking like that? And you've got many other applications for trust.
Speaker 1:Or who should consider a trust.
Speaker 3:There's still a place for trust and obviously I don't necessarily agree with having many trusts for every asset, but I think there are circumstances where it's needed and, like the one you've said, the protection of your assets when you've got a business against creditors, against one person not paying you, for instance, and your business goes under. That is one reason. Also, protection of assets for minor children or for children or other family members who are not financially astute, can't handle their own affairs. That still has really a role to play there. We see a lot of trusts as part of structures for business interests, where people typically would have operating companies held by a holdco that's held by a trust and the reason for that is really to keep the business interest out of your personal estate for protection, but also the estate admin process.
Speaker 3:Nowadays the delays you experience are really huge. It's very frustrating to not have the business interest, have to value it and have it part of your personal estate and part of your estate duty admin process. Executive fees often proves to be really beneficial. Just keep it separate. They're a very valid reason to do it as well. What we also see is where somebody has been diagnosed with dementia, for instance, or Alzheimer's or really getting old and losing the ability to handle their own affairs, it can be very valuable to use a special trust in that instance as well can I just ask for people who don't know, like me, what is a trust?
Speaker 3:a trust is, that is, and you can call it an entity. It's not a legal person, but it's an entity which is created by way of an agreement between the founder and the trustees for the benefit of the beneficiaries. And your agreement really contains a bundle of rights, spelling out what we must do, what, and creating this structure which is really trustees looking after assets for the benefit of somebody else.
Speaker 1:And how you'd explain it is. It's almost like a business. So a business isn't a person, but it is this thing that need people to manage it and have their financials done and things done in the right way so that that can work.
Speaker 4:So what are the benefits then of having your business in a trust? If, say, you have a well, not a creditor, but somebody owes you money. They don't pay you, and then your business gets into trouble. What are the benefits then?
Speaker 3:It doesn't affect your personal estate.
Speaker 4:Right, so the creditors can't come after you.
Speaker 3:They can't attach your home can't come after your home where your family lives, and that kind of thing.
Speaker 4:Okay, okay, thank you.
Speaker 2:But then what happens to the control? Because now that asset that you used to own, it's in another entity. So let's say my house is in that entity. Then I don't have control over it, do I?
Speaker 3:You shouldn't have control. That's the thing that us Africans don't really like a lot is that we have to give up control over our assets when we place them into a trust, and we don't understand that often and it's a bit of an education process because it doesn't belong to you anymore. It now belongs to the trustees on behalf of the beneficiaries in their capacity as trustees, so they have to make the decisions. You can't make the decisions on your own, because then you run the risk of the trust being an alter ego and they're looking through the trust and saying you're controlling the trust assets as if it's your own, so we will regard them as your assets for all kinds of different purposes.
Speaker 4:So who would be the trustees If I set up a trust? Do I get to name the trustees? Who would be the trustees If I set up a trust? Do I get to name?
Speaker 3:the trustees. If you're the founder, you will approach the first trustees whether they're willing to be appointed and you can be a trustee as well as the founder, not the only trustee though Nowadays you should have an independent trustee on South African Trust as well but other than that, you can have family members your wife, your brother, your sister, your children when they're able to act.
Speaker 2:Could you have three?
Speaker 3:Three is a good number to have because you can have a majority vote, so you don't have four where you can have a deadlock with decisions. Three is really a good number, but one has to be an independent.
Speaker 4:So, Warren could have him. Is that legally one has to be an independent, so Warren could have him, or is that legally one has to be an independent.
Speaker 3:It's in terms of there was a remark in the Parker case by Judge Cameron that every trust in South Africa should have an independent trustee. Okay, and then it started being practiced, but now the Chief Master has issued a directive that the Master's officers must apply. It like that.
Speaker 4:Okay.
Speaker 3:They will not make changes to a trustee or appoint trustees if you don't have an independent, so they apply it as if it's law, but it's not really law.
Speaker 2:Okay, so Warren could have him, his wife and you.
Speaker 3:Yes, martin would be an independent, and an independent yes.
Speaker 2:And then just back to the business. So if somebody has a business and they own 25% of that business, are you saying that the shares that they own are now owned by the trust?
Speaker 3:Yes, If the trust bought the shares in the business or they sold their shares in the business to the trust, then the trust owns those shares in the business, or they sold their shares in the business to the trust, then the trust owns those shares in the business. The trustees can appoint a director and they will. I mean the director runs the business, but it's held by the trust.
Speaker 2:So it's a good idea to, when you start a business, to consider as you form the business to the owner or to form a trust as well that owns your business. Could I ask Martine one question A friend of mine has put their house or to form a trust as well that owns your business.
Speaker 4:Could I ask Martine one question? A friend of mine has put their house they bought in a trust. What are the benefits of that? Why would someone do that?
Speaker 3:The house they live in.
Speaker 4:Yes.
Speaker 3:Primary residence. The disadvantage of having it in a trust is if you sell it you don't get the two million abatement or deduction for capital gains tax.
Speaker 4:Okay.
Speaker 3:You only get that if it's your primary residence and it's in your own name, okay. But people do put their primary residences in a trust for either protection or because it's in an area where it's going to grow so much in value that they want that growth out of their personal estate and in a trust structure.
Speaker 4:Oh, so for okay, so it's a tax thing, then it's an estate planning thing? Yes, okay, and what would the protections that are offered through a trust for somebody?
Speaker 3:Because it's protected from your own creditors. It's protected from your children's spouses. It's protected from your children's spouses, so they get divorced and their own assets are part of the divorce settlement, but when it's in a trust it doesn't belong to them. It's not part of the divorce settlement except if they don't manage the trust properly and it's seen as their alter ego and they control it Like you mentioned earlier. Yes, Then it can be added back into the divorce settlement.
Speaker 4:It's almost like a layer of insulation from the world.
Speaker 3:Yes.
Speaker 2:But, Martin, you can't have a bond and be free of credit as a Marat If that property is bonded to ABSA Bank and….
Speaker 3:Then it's the trust normally who would have the bond. If the property is in the name of the trust and then the trust has got the liability, yeah, so it's not to say that that can't be attached, because they still own the they still owe the money to.
Speaker 3:it's got to be an asset that's paid for, ideally right yeah, lots of assets, um, lots of houses or properties are held in a trust and other assets, while with bonds on or loans against it. Um, not necessarily an issue that you can have it. Um, it's just that you're you're not protected.
Speaker 4:That asset is not protected as far to the extent of that loan yes, okay, that particular loan, but nothing to do with your other personal loans. Okay.
Speaker 2:Sorry, can you just talk a little bit more of the business being owned by a trust? How does it ultimately help, say, the owner or the shareholder of that passes away or sells one day? How does that benefit them?
Speaker 3:Okay if it's owned by a trust. The business is, say, say, in a company and the company shares is held by the trust. So the the director of the business, because he's not the owner anymore. It's owned by the trust he passes away. The business is not part of his estate, it's not an asset in his estate. The succeeding directors can carry on with the business operations. There's continuity. There's no freezing of assets. There's no executors fees on the value of the business operations. There's continuity. There's no freezing of assets. There's no executor's fees on the value of the business. No valuations have to be done. It's completely outside of his personal estate.
Speaker 2:But how does his spouse or her spouse get the value of the business They'd be?
Speaker 1:beneficiaries on the trust, so they would get that and you could have a buy and sell still with the trust.
Speaker 2:So in other words, the buy and sell will pay, and then the trust receives that money right, and then the spouse is the beneficiary of that.
Speaker 3:Spouse and children are generally the beneficiaries on the trust, so they can benefit from that point of view.
Speaker 1:So I think in a way the business is protected from estate duty. It's protected from creditors, in a way being in a trust. Also, if they were to get divorced, the business doesn't necessarily have to be split and you can have those buy and sell. So if they don't think they'll be able to run it, you would get that money.
Speaker 4:So if a business had a loan agreement with a bank that that business was in within a trust, the the bank would have the loan agreement with the trust correct, yes, okay. So then in that situation, if you had creditors who didn't or people who didn't pay you and you need to pay the bank back, the bank can go after the trust yes, yes, but what's in the trust, not what's in your name yes only after that okay
Speaker 4:okay. So it entirely depends on your business model as well. You know, um, for example, my father works for a big company and, uh, they have a bank who is has a loan agreement with them because it's constantly moving goods. So in that particular scenario it wouldn't make any sense for the owners to put in a trust, because that lifeline of constant loan from the bank is very necessary.
Speaker 3:Yes, it depends from business to business.
Speaker 4:Yeah.
Speaker 1:And person to person, I think, because there's a lot of factors. As you mentioned off air, you can't necessarily have a tick box. But when you are thinking of you mentioned off air, you can't necessarily have a tick box. But when you are thinking of a trust, again, I think it's about a lot of versions of you that you've got to consider. What do you want to leave your children? If you put it in a trust early enough, you can save a lot of estate duty. Is there continuity? What happens if you got divorced Creditors? There's quite a lot of questions. Do you maybe have a breakdown of what questions they could ask or how you would consider it?
Speaker 3:Sure, normally one is just guided by the circumstances that's being sketched to you when you sit to give advice. So that'll lead the questions really.
Speaker 1:Can you give an example of a sketch that you'd normally guess?
Speaker 3:You would normally ask around, family members around, who are they? Are they minors, are they older people who's got to be looked after? That could get to a dementia situation. Then, if you go to the business side, how is it run? Who is there? What's the continuity? If you go to the business side, how is it run? Who is there? What's the continuity? What's happening here? Who are the creditors? What are the liabilities? And I mean normally we would look at the financials of the business to get an idea of what's going on there, to see whether it would be viable to do this at all.
Speaker 2:So would you donate the business to well, the shares in the business to a trust later on, or is that a complication?
Speaker 3:You can either donate, pay the donations tax or sell your shares in the business on loan account to the trust, which is what lots of people do.
Speaker 2:And all those loan accounts. Still isn't there an interest around that? Another change that happened.
Speaker 3:Yes, there is a change. You can do it interest-free still, but then you get Section 7C donations tax that become applicable. So what that really means is every year at the end of the financial year you calculate what the interest would have been at the SAR's official rate and you pay donations tax on that because you didn't charge it. So you donated the interest to the trust. So you pay donations tax, but the donations tax is often a lot less than charging the interest to the trust. So you pay donations tax, but the donations tax is some.
Speaker 1:It's often a lot less than charging the interest and paying income tax on it and then if you passed away, what happens to that outstanding loan would would there be?
Speaker 3:it's an asset in your estate so obviously the the advantage of it is it's pegged in value. So the business didn't grow in your own estate, it's the loan that's pegged in value. That's part of your estate as an asset. So on that asset you will pay estate duty if you got a dutiful estate after the deductions you allowed. But what you can do, you either bequeath a loan in your will specifically to your spouse then there's no estate duty on the loan because bequest to spouses is outside of estate duty or what lots of people do is they bequeath that loan to the trust that owes them the amount. Then the trust doesn't have to repay it. It's really then cancelled by way of the bequest and then afterwards the loan is gone and your family members don't have it and they don't have the tax consequences on the loan. But it's still an asset in your estate for estate, except if it goes to the spouse, obviously.
Speaker 1:And often I feel like everybody leaves everything to their spouse, and I know this one lady. She got left a business. It was a panel beating business. She had absolutely no clue what to do and because she was left this yes, she didn't pay, you know, 20% estate duty because it was left to her, but that business went down to the ground and they had nothing left. So sometimes these structures just help you have the right team around you, I think.
Speaker 2:Absolutely, but a lot of people it wouldn't apply, right, If you've got a person like me, I've got a property Okay, we do have a business, but I've got a property and other assets there's no real reason to try and protect those assets against creditors. So I wouldn't form a trust now and I would have formed a trust in my world when my children were under 25.
Speaker 3:A testamentary trust A testamentary trust.
Speaker 2:Yeah, so I see a big role for that Absolutely Testamentary trust, very much so.
Speaker 3:Yes, testamentary trust big role for that in a world, especially for minor children or anybody who can't look after themselves or their finances.
Speaker 2:Yeah.
Speaker 3:And the advantage of that, you don't have all the trust fees while you're alive Every year that you've got to pay for a trustee for tax and accounting.
Speaker 2:It's only formed on your debt.
Speaker 3:It's only formed on your debt. So only if and when it's applicable, because maybe at that stage your children are now not minors anymore, they're over 25 or what? Yes, because maybe at that stage your children are now not minors anymore, they're over 25 or what. The other advantage with that in the will is, when you leave something to minors in a will say you've got the typical scenario I leave everything to my spouse, failing him, I leave everything to my children and my children are minors.
Speaker 3:I don't want it to be paid to the guardian's fund, because I don't have control over that. So your other two options is you say the guardian must look after it for the children until they're 18, but then it's only until 18, because the guardian falls away at 18. So if you wanted somebody to manage it for them until a later date, um say age 25, testamentary trust steps in and that's your best solution, then and then if, by the time the last spouse dies, the children are over 25, the trust is just not set up.
Speaker 3:It goes to their own names. Something else that I wanted to mention where trust is also very beneficial is where you have, where people have, say, for instance, a holiday home. They've got a holiday home in Plet that's being used by the whole family when the children are little. It's this nucleus of family using it. The children leave school, they go and study overseas, they work overseas, they come on holiday to Africa. They also want to go to the plet house and use the plet house. If that house is in a company and they use it. You've got french benefit tax use problem and under the spotlight at the moment with SARS. If it's held by a trust, you normally have a clause in your trust deed that says the trustees may allow beneficiaries to use trust assets on whatever terms, in other words, paying a rental or just paying usage for the holiday that they're there. There's no fringe benefit tax so the beneficiaries can use that house. It's really beneficial when you have that structure for an asset like that, like a game farm, a beach house or whatever.
Speaker 2:And I suppose also when the parents pass on, they might stop any fighting amongst the children as well.
Speaker 3:Yes, Now it's still held by the trust, the trust must just have other investments or liquidity to maintain this house, then it's still held by the trust. The trust must just have other investments or liquidity to maintain this house, then it's a perfect scenario and all the children can use it. They work it on a rotating calendar or whatever.
Speaker 2:Okay, that's a really good idea.
Speaker 1:Awesome. Thank you so much, Martine Pleasure.
Speaker 2:That was great. Thanks, informative. Thank you Pleasure. Thank you for listening. No-transcript.