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Consequences of using a trust for estate planning

31 August 2012   (0 Comments)
Posted by: SAIT Technical
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By Ben Strauss (DLA Cliffe Dekker Hofmeyr Tax Alert)

A well-known estate planning technique is this: A person sells a growth asset to a trust on loan account.The asset that remains in the person's estate is the loan account, the value of which is pegged at a fixed amount. The growth of the asset is in the hands of the trust, which falls outside the seller's estate for estate duty and capital gains tax purposes.

From a tax perspective, the plan may work. But it should also be borne in mind that the transfer of an asset to a trust has other consequences. This was shown graphically in the recent Supreme Court of Appeal case of Raath v Nel [2012] ZASCA 86.

The facts of the case were briefly the following. Mr Nel, a successful businessman, sued Dr Raath, an anaesthetist, for damages in respect of the consequences of a failed intubation prior to a back operation which Mr Nel was scheduled to undergo. Among other things, Mr Nel claimed damages for the loss suffered as a consequence of his inability, due to the failed intubation and its consequences, to attend to the same extent as before to the affairs of one of his companies. This resulted in the company making reduced profits for the period 1 May 2000 (when the failed intubation occurred) and March 2003 (when Mr Nel had recovered sufficiently to attend fully to the business again).

Mr Nel was the sole shareholder of the company. However, on 1 April 2001, for estate planning and estate duty considerations, he sold his shares and loan account in that company (and all his other business assets) to a trust. Mr Nel was not a capital beneficiary of the trust but he was, in the discretion of the trustees, a potential income beneficiary of the trust.

Dr Raath's defence to the claim for the loss suffered was that any loss was incurred not by Mr Nel personally, but by the company and the trust.

The court upheld the defence. It considered certain cases and reaffirmed the principle that "a trust estate, comprising of anaccumulation of assets and liabilities, is a separate entity, albeitbereft of legal personality". The court concluded that "theseparateness of the trust estate must be recognised and emphasised,however inconvenient and adverse to [Mr Nel] it may be". Inother words, the court held that, from the date that Mr Nel hadtransferred his assets to the trust, the benefits and losses in relationto those assets accrued to the trust, and not to Mr Nel. And so, from that date, Mr Nel had no claim for losses suffered by his company.

What the case illustrates is that a person who transfers an asset to a trust must understand clearly that, while the scheme may have a tax benefit, it may have other practical consequences. The asset is no longer that of the person and the risk and rewardpasses to the trust. Also, the person may lose control of the asset that vests in the trustees.

Persons should be careful when using trusts in estate planning and should, in addition to the tax implications, also consider the practical implications of setting up a trust.


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