The Future of Trusts
19 September 2016
Posted by: Author: Henry Hollingdrake
Author: Henry Hollingdrake (Amicorp)
Although revenue authorities place an ever increasing focus on the role of trusts, they remain an essential wealth planning and management structure.
Whenever you write an article which has the heading, "The future of….” - the inference that can be made is that the future in question appears to be threatened. In this case of trusts, this is simply not true. The correct inference to make is that the rationale behind the use of this extremely efficient planning tool is being questioned, specifically from a tax and information transparency perspective. In this regard, CRS (common reporting standards), have had an effect.
A trust is essentially a legal agreement between a "donor” (South African term) or a settlor and a trustee or trustees who have agreed to manage the trust on behalf of certain named and un-named beneficiaries of the trust’s arrangement.
Keep in mind that the donor of the assets essentially gives up all legal title to these assets and the trustees are legally empowered to look after and manage the asset(s), most likely using an investment manager. The trustees also need to eventually distribute the income and capital to beneficiaries as set out in the trust deed.
In the case of a discretionary trust, they may distribute such income or assets at their sole discretion. A trust can also be styled as a vesting as opposed to a discretionary trust, in this case income and capital based on pre-determined calculations accrue or vest in the relevant beneficiary. This distinction is critical from a tax and estate planning perspective.
I am sure many are aware that it is every person’s right to arrange one’s affairs in such a way so as to legally and honestly reduce a tax or regulatory burden. In this context, trusts are regarded as extremely efficient estate planning tools, creating the complete environment for a smooth and efficient exercise of an estate plan. They allow for, inter-alia, asset protection; efficient transfer of assets; coordinated management and control of the assets and the investment thereof. By transferring assets into a trust there is a legal separation of assets as well as the growth that accrues on those assets away from the individual.
The current focus prevailing in South Africa is the extension of the focus on local trusts to off-shore trusts and associated structures. This focus is fueled by new OECD provisions relating to the transparency of international or off-shore investments.
Effectively, if one accepts that from 2017 onward we will have entered into a new realm of transparency of financial structures in many cases involving the use of a trust, and such a structure is set up in a legal and efficient manner, then the "future of trusts” is more an evolving process.
From a South African and off-shore perspective, there is no doubt that the investment in a hard currency such as the US dollar or the Euro, makes perfect sense when trying to ensure diversification of a portfolio investment. In this regard, such investments will invariably need to be structured specifically in the cases of complex investment strategies as well as in the case of complex family arrangements where future heirs will not be based in South Africa any more. This scenario would call for the setting-up of an off-shore trust structure. There is also the possibility that such a structure can also have the effect of tax efficiency with enhanced returns. Any subsequent vesting or distributions to beneficiaries will carry a tax charge depending on where the said beneficiary is tax resident and depending on the nature of the distribution, whether it is capital, income or a dividend for example.
The truth of the matter is that as we evolve into an age of transparency, greater emphasis must be placed on creating legally robust and efficient wealth preservation structures that offer controlled managed as well as future efficient distribution and are flexible enough to allow for structural changes from time to time.
A subject that is a natural "successor” to this topic would be the "trade-off’ between an off-shore’ jurisdiction in favour of an on-shore jurisdiction. Those jurisdictions who look to benefit from the inflow of capital into their economy and such inflows should and will be encouraged more and more into the future, just look at the USA.
This article first appeared on the September/October 2016 edition on Tax Talk.