Please note: Our office will be closed between 23 Dec and 6 Jan. We wish you and your loved ones safe travels, a blessed Christmas and a happy 2022!
Many people place their trust in trusts when it comes to minimising estate duties. Let’s not forget what they can achieve in tax planning for your lifetime.
We have previously written about reasons to register a trust. These entities can hold many benefits. While they are often lauded for the advantages they offer in estate planning – and rightly so – trusts can also provide various tax benefits during your lifetime.
Let’s take a look at five of these tax advantages.
When a trust is income-generating, the earnings can be distributed to beneficiaries in lower tax brackets. This strategy can reduce the overall tax burden, as the income is taxed at individual rates instead of the higher rate of the trust. In this case, the key advantage of a trust is the ability to manage and optimise the tax liabilities of a family in a way that might not be possible with direct income earnings by individuals.
Here is an example:
Imagine a family trust earns R400,000 in investment income. Among the beneficiaries, some are in high tax brackets, others are in lower brackets, and the trust itself is taxed at the highest rate. The trustees decide to distribute the income in a way that maximises tax efficiency:
This approach minimises the overall tax burden by optimising the distribution according to each beneficiary’s tax situation.
While trusts in South Africa are subject to capital gains tax at a higher rate than individuals, they offer flexibility in managing this tax. Trustees can control the timing of asset sales to potentially minimise taxes. Additionally, distributing gains to beneficiaries allows them to use their own annual capital gains exclusions, which can reduce overall tax liabilities.
Certain expenses related to the administration and management of a trust can be deducted from the trust’s taxable income, reducing the trust’s overall tax liability. These include legal fees, accounting costs, and other operational expenses.
This offers a potential tax advantage that individuals managing their finances independently might not fully obtain.
A trust set up to make charitable donations can benefit from tax deductions, reducing its taxable income. This allows the trustees to support causes they care about while benefiting from tax advantages.
Trusts offer flexibility in tax planning by allowing the strategic allocation of income and assets. Trustees can align distributions with the financial circumstances of beneficiaries to reduce tax liabilities. This includes considerations beyond just income tax brackets, such as timing of distributions, individual financial needs, and other tax implications, to maximise the overall tax efficiency. In other words, trusts offer a legal and adaptable vehicle for tax strategising.
Trusts could be a powerful tool for managing taxes during your lifetime and beyond. However, they are not the best option in all circumstances.
Consulting with tax advisors is essential to maximise tax benefits and ensure that a trust aligns with your financial goals. You can trust (excuse the pun) our tax experts at Huysamen Westraad Inc. to guide you in this process. Let’s talk.
.png)
