5 Tax Benefits of Trusts Beyond Estate Duties

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.  

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1.Income splitting

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:

• R250,000 is distributed to two beneficiaries in lower tax brackets.
• R100,000 is distributed to another beneficiary in a moderate tax bracket.
• The remaining R50,000 is retained within the trust.

This approach minimises the overall tax burden by optimising the distribution according to each beneficiary’s tax situation.  
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2.Capital gains tax management

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.
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3.Deductible expenses

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.
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4.Charitable contributions

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.
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5.Strategic tax planning

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.