RA’s as an Alternative Trust instrument

Considering the various legislative changes to Trusts over the past year, a lot of speculation has emerged on the future of Trusts as an estate planning tool.

Although Trusts have been placed under the spotlight, the purpose of the Trust and the circumstances of each client should be the determining factors in deciding to create a Trust. When considering the appropriateness of a Trust, the following factors should be taken into account in order to determine the suitability thereof (the numerical order of the factors is generally the ranking in importance of the factors in making a Trust decision):

  1. Protection of assets from creditors (business owners often have substantial external risk which can be mitigated through the use of Trust vehicles)
  2. Personal circumstances of the client and his/her family
  3. Growth pegging of assets
  4. Tax implications. (This aspect has in the past been used too aggressively by planners and is the aspect of Trusts which is the most under attack by revenue authorities. If a Trust is formed with emphasis on taxation, it is likely to fall short of future objectives.)
  5. Cost of ongoing administration and compliance.The creation of a Trust will create an additional layer of administration actions and costs and requires active participation and monitoring in order to remain compliant. Many clients with Trusts find this aspect of Trusts extremely difficult to deal with

If a Trust, however, taking regard to recent changes in terms of Section 7C of the Income Tax Act and the above mentioned factors and costs, does not meet your expectations, then consideration of the use of a Retirement Annuity might just tick all of the boxes. Retirement Annuities (RA) have become a popular estate planning tool as a result of, not only, the tax savings opportunities, but also the benefits of using an RA to achieve growth outside of your estate as well as the protection of assets from creditors.

Albeit the fact that both a Trust and RA have a place, taking into account the circumstances of each person, it is worthwhile to mention the benefits of a RA as an alternative to the use of a Trust. To further argue the popularity of the RA in recent years, an increased tax deduction for retirement savings from 15% to 27.5%, has only made this planning tool more attractive as a substitute for trusts.

Take the following table into account to compare the similarities between the two vehicles. Except for the significant difference in structuring of payment, the similarities are uncanny.

Factors Trust Retirement Annuity
Growth Pegging Growth takes place within the Trust Growth of assets takes place within the the RA
Protection from Creditors Separate legal entity, thus protected from creditors Protection from creditors in terms   Section 37A and B of the Pension

Funds Act.

Tax Implications when assets are placed in the Vehicle 1.    Subject to Donations Tax at 20% for donations less than R30m or 25% for donations greater than R30m in any tax year; or

2.    Capital gains Tax Implications when sold to the Trust; or

3.    Interest at the official rate on funds loaned to the Trust.

Contributions qualify for an

income tax deduction:

Limited to the higher of 27.5% of remuneration or taxable income,

subject to an annual ceiling of

R350 000.

Tax implications on income received within the Vehicle Taxed according to the conduit principle at marginal rate of beneficiary;

 

Taxed within the Trust at 45%

Taxed within the Four Funds

Approach at 0%

Estate Duty implications Separate legal entity – thus no estate duty implications Does not form part of your estate – thus no estate duty implications.
Liquidity Discretion of Trustees in terms of the Trust Deed to distribute income/capital to beneficiaries. Funds are only available at death, retirement, retrenchment;

At death, the Trustees of the Fund

have a discretion in terms of

section 37C of the Pension Funds

Act of distribution of funds to

dependants – thus beneficiary

nomination not binding.

 

The RA has the following added optionality benefits for the client who reaches Retirement age (age 55 onwards).

  • The client can retire from the RA and can convert 100% or a minimum of 2/3rds of the RA value into an Investment linked annuity. This annuity retains the protection benefits of the RA and the client nominates beneficiaries upon his/her death and can put in place structures to facilitate future income support for spouses and or financial support for other family members.
  • Under current legislation, the client doesn’t need to retire from the RA and so could retain the structure for his/her lifetime to ensure facilitation of the “Trust” factors mentioned above.

If we take the table above into account, the advantages of an RA when compared to that of the Trust confirm that should a trust not be the best suited vehicle, an RA can be the second best, if not, in certain circumstances, the best replacement for your specific purpose.

The Minister of Finance, in his 2018 Budget Speech, announced a long-anticipated amendment to the rate of estate duty. With effect from the 1 of March 2018, estates with a net asset value of less than R30 000 000 will be subject to estate duty at the rate of 20%, and for those estates with a value greater than R30 000 000, the rate increases to 25%. For those persons who fall into the latter category, it may be prudent to take advantage of RAs in order to ensure that, as far as possible and taking into account annual limits applicable to RAs, your dutiable estate falls below the R30 000 000 bracket, so as to reduce your estate duty liability while still ensuring that your dependants are financially provided for.

There isn’t a one size fits all answer to the ongoing questions around the future or suitability of trusts, but it might reassuring to know that there are other options available to suit your specific circumstances. Generally speaking, if the client is more concerned with personal family circumstances and the future protection of assets and provision of financial support for potentially indigent family members, then the RA might be a far simpler and more cost effective option than a Trust.

 

Source: BizNews – Remay de Kock and Kezia Talbot BDO (with modified and additional content by Jeremy Squier WA Bespoke Solutions)