Carol-Ann

ARE YOUR BUSINESS ASSETS PROTECTED

                      Your Business Assets – Are They Protected?

It is common practice by entrepreneurs to have their trading entity own their business assets and in this way take advantage of the depreciation benefits.

By housing your assets in the same entity which creditors and SARS could potentially have access to, you are unnecessarily exposing them to risk. Should your business fall on bad times and is unable to meet its obligation, its creditors may then attach all business assets owned by the entity. How then do you protect your assets from the potential risk of the trading side of your business? The answer is simple – purchase your assets in a Business Asset Trust. In this way, your assets will not be exposed to the risk associated with the conducting and carrying on of your business.

What many may argue is that by having your assets held by a separate entity, the depreciation benefits are lost resulting in a higher tax obligation. It is correct that you cannot utilise the deprecation benefit in your trading entity, however, your tax obligation should not be any different. No entity would simply allow another entity to utilise its assets without compensation. Same goes for the business asset trust. The business asset trust needs to be compensated by the trading entity for the utilisation of the assets. As a result, a rental agreement is entered into between the trust and the business whereby the business rents the assets from the trust and pays a monthly rental. Your bottom line is then not affected as your expenses are increased by the rental paid.

Having addressed the importance of your business assets being owned by a trust, what now needs to be determined is which trust to utilise. While it is important to keep your structure as simple as possible you cannot ignore the potential risks that may be attached to your business assets. They could be exposed to Landlords, creditors, staff, and vicarious liability to name but a few. Your assets could also be geared, particularly if your business requires large machinery. If you were to have your family trust own your business assets then you would expose your risk free assets to these factors and defeat the object of the family trust. Another important factor, when considering which trust to utilise, is whether or not you have business partners or if there is potential that a new partner may be introduced. Again, if your family trust is the owner thereof, your new business partner would now be a party to your family trust and have access to your personal assets! Furthermore, by having your assets owned by the family trust, you could have a potential tax burden as the trust would be renting the assets to the business, thereby making it a trading trust. Moreover, VAT would also be an issue as you may want to register the trust for VAT and you cannot register your family trust for VAT as there could be further tax consequences as a result.

We would also not suggest that the assets are held by your residence trust for the same reason and any property or business trust for reasons of ring fencing your risk.

It is evident therefore that a separate business asset trust be set up which can be created to incorporate your specific requirements and ring fence your risk.

Should you be starting out it is easy to set up your structure correctly. If, however, you have been trading for some time and have housed your assets in the incorrect entity, the restructuring of same must be effected correctly so as to ensure that you are not exposed to higher tax burdens and you do not contravene the Income Tax Act. It is therefore important that you consult with the correct advisors when implementing same.

YOUR PROPERTIES SHOULD BE REGISTERED IN A TRUST

“A MUST READ”

 

YOUR   PROPERTIES SHOULD BE REGISTERED IN A TRUST – WHY?

 

 

It has become a fairly popular practice (especially amongst   affluent people) to register property in the name of a legal entity such as a   close corporation, company or trust rather than in their personal names. A   trust is a popular choice, particularly where residential property is   involved. Many people elect to go this route without having a clear   understanding of the nature of a trust or the implications of registering   their property in a trust.

 

 

As with most things in   life there are both advantages and disadvantages to registering property in   the name of a trust. One of the advantages is that trusts facilitate estate   planning. Furthermore having property registered in the name of a trust is a   means of protecting the property against one’s creditors. In addition there   may also be certain tax advantages to having a property registered in the   name of a trust.

 

 

FURTHER DETAILS IS SPOKEN ABOUT INDEPTH AT OUR

“TRUSTS FOR BUSINESS OWNERS” SEMINAR

 

For most people, the single biggest   advantage to placing a home in a trust occurs after they die: It allows their   survivors to save the cost and time of putting the property through probate,   which is the common court proceeding required to transfer the title to it.
Those who want the property to passes to a spouse may also structure the   trust to avoid some estate taxes. And revocable trusts are a good option for   those who wish to maintain some flexibility and control over their estate   plans, as the trusts may easily be amended any time.

 

 

SECURE YOUR FUTURE

“FOR LASTING PEACE OF MIND” contact Carol-Ann to enroll yourself into the Seminar:

  (011) 326 4139

MARRIAGE AND TRUSTS

When determining how to structure your Trust Deed one needs to realise the implications that the marriage system in existence between the Trustees has on how the trust is created.

Marriages are governed by the Matrimonial Property Act 88 of 1984. This Act allows for three different marital systems. One can either marry in community of property, out of community of property with the application of accrual or out of community of property without the application of accrual. If one is married in community of property the two estates are amalgamated into one. If one is married out of community of property then the spouses retain their separate estates. When establishing a trust, however, the assets owned by the trust do not form part of either estate and therefore will not be taken into account in any settlement agreement or winding up of a deceased estate, provided of course that the trust is not a sham Trust. When creating trusts our concern with how you are married, therefore, is only for purposes of determining who will be a Trustee on the Trust and as a result retain control. In most cases the joint household assets will be moved into the Family Trust. By moving the assets of the Trust each spouse is divested of ownership of those assets (whether they were jointly owned in undivided shares or were individually owned). In order to retain management over those assets therefore each spouse will need to be a Trustee on the Trust.

There are circumstances, however, when it is advisable that only one spouse be appointed a Trustee on the Trust. If a trust is created for purposes of investing in property and the Trustees are married out of community of property, it is advisable that only the spouse with the greater income be appointed as Trustee. In this way any exposure attached to the signing of surety lies with only one spouse and the spouse who is not a Trustee is protected against such risk. Should the spouse who is a Trustee then be sequestrated the other spouse can then be appointed a Trustee in his/her place and thus keep control over the assets in the trust within the immediate family unit. Another instance where only one spouse is appointed would be in a Business Trust. Often in an ante-nuptial agreement business interests of the parties are excluded from the accrual. The way in which to exclude your business interests from a claim from your spouse in a trust structure is to not have your spouse appointed as a Trustee.

The trust structure can be an even bigger advantage if one is married in community of property. Due to the two estates being amalgamated into one, the assets of one spouse are the assets of the joint estate and more importantly the debts of one spouse are the debts of the joint estate. It follows therefore that if one spouse goes insolvent then so does the other spouse. By moving ones assets to the trusts they are therefore protected and one spouse, through a bad business decision or just bad luck, cannot influence the joint wealth as it is housed in the Trust. Furthermore, on death the estate is frozen during the winding up process. This process can, if it is a large estate, take up to 2 years to complete. During this period the surviving spouse and children have no or little access to the estate. This is made worse if one is married in community of property as the joint estate is frozen meaning that the surviving spouse’s assets are also frozen! If the estate is in Trusts then, financially, the death of one spouse has no impact on the surviving spouse and children because they have immediate access to the assets and cash held in the Trust.

In summary by moving ones assets into trust does not invalidate the marriage system between the spouses but because there are no assets left in the spouses’ personal capacity the system in which the spouses are married becomes irrelevant as any division of assets on divorce or death will be dealt with through the Trust and therefore governed by the Trust Deed itself and the Trust Property Control Act 57 0f 1988. Keep in mind however, if you are not a Trustee on the Trust you do not have any management over distributions and/or claims to the assets (or the use thereof) from the Trust.

OFFERS TO PURCHASE AND THE AUTHORITY TO ACT

In terms of the case, Thorpe vs Trittenwein [2006] SCA 30 (RSA), the need to obtain all trustees authority (or majority if required by the deed) to enter into an offer to purchase was highlighted. In referencing section 2 (1) of the Alienation of Land Act 68 of 1981, the courts held that the agent acting on behalf of the entity (in this case a trust) was required to have the necessary authority to do so in writing.

Section 2(1) of the said act states that “no alienation of lands after the commencement of this section shall, subject to the provisions of Section 28, be of any force or effect unless it is contained in a deed of alienation signed by the parties thereto or by their agents acting on their written authority”

The courts held that you are to refer to the Deed itself to determine the requisite authority and then to have that authority reproduced in writing. What is even more important is that the court held that the requisite authority could further not be ratified. The courts argued that because the trustee did not act with the necessary authority, the agreement of sale was void ab initio (from inception). It follows therefore that a transaction void ab initio (i.e defective from inception) cannot be ratified.

The administrative implications of this case is that when entering into any transaction relating to the alienation of land you as trustee must have the necessary authority to do so. Reference must be made to your deed in determining the requisite authority. Given that most property trusts are established with only two trustees, namely yourself and the independent trustee it is imperative that ALL trustees give the requisite authority. The implication of this, therefore, is that on the signing of any Offer to Purchase, the independent trustee must be informed in order that it may draft and sign a resolution authorizing you to enter into the Offer to Purchase. A generic property resolution cannot serve your purpose in this regard as this is a clear indication to the courts that you are acting independently of your independent trustee and therefore separation between yourself and the trust is lost and the courts are able to attack same.

In summary therefore, we advise that whenever you enter into an offer to Purchase obtain a resolution from all trustees authorizing you to enter into the particular transaction and ensure that the resolution is signed at the time of entering into the transaction.

HOW DIVORCE WILL AFFECT YOUR TRUSTS

As unpleasant as it may be, divorce is unfortunately a possibility that must be faced and, accordingly it is a factor that we must keep in mind when establishing a trust. One of the benefits of having assets owned by a trust is that these assets will then be protected from divorce proceedings. However it is extremely important that a trust is correctly drafted ab initio, and that the trust is thereafter correctly administered.

I will turn to the rulings of our courts’ in various divorce matters to look at what they took into consideration when determining the redistribution of assets during divorce proceedings.

  • When was the trust formed and by whom?

    In the case of VAN DER MERWE v VAN DER MERWE (2002) the court took into      consideration firstly if the trust was formed whilst divorce proceedings      had been instituted and were pending, and secondly whether the assets were      moved into a trust with the sole purpose/intention of removing assets from      the matrimonial estate. The facts in this case were that the husband had      sold the family home to a trust he had founded, at a value well below      market value. The court held that the family home was still to be      considered part of the husband’s estate for the calculations of the      redistribution of assets.

  • How was the trust administered?

    In the case of BADENHORST v BADENHORST (2001) the husband had retained      full control of the assets of the trust and there was no clear      ‘independence’ in that the trustee had reached all decisions by himself,      the court held that the trust was merely the alter-ego of the founder and      trustee. Once more the assets in the trust were considered part of the      husband’s estate for the calculations of the redistribution of assets.

In summary should a party be in the process of a divorce, that party can not move assets from their estate to a trust for the sole purpose of divesting their estate of assets.

A trust must at all times be carefully drafted by a trust expert to ensure that there are no elements of control that will result in a trust being deemed a “sham” trust which is merely the alter-ego of the founder and trustee.

Lastly, it is of paramount importance that a trust is properly administered so that the independence of a trust is clear to all parties. Not only must there be an independent trustee on the board of trustee of a trust, but that independent trustee must also play an active role on the board of trustees.

In conclusion, be proactive, ensure that your assets are protected from all the unpleasant possibilities, such as divorce, by setting up your trusts before things go wrong.

MARRIAGE and TRUSTS

When determining how to structure your Trust Deed one needs to realise the implications that the marriage system in existence between the Trustees has on how the trust is created.

Marriages are governed by the Matrimonial Property Act 88 of 1984. This Act allows for three different marital systems. One can either marry in community of property, out of community of property with the application of accrual or out of community of property without the application of accrual. If one is married in community of property the two estates are amalgamated into one. If one is married out of community of property then the spouses retain their separate estates. When establishing a trust, however, the assets owned by the trust do not form part of either estate and therefore will not be taken into account in any settlement agreement or winding up of a deceased estate, provided of course that the trust is not a sham Trust. When creating trusts our concern with how you are married, therefore, is only for purposes of determining who will be a Trustee on the Trust and as a result retain control. In most cases the joint household assets will be moved into the Family Trust. By moving the assets of the Trust each spouse is divested of ownership of those assets (whether they were jointly owned in undivided shares or were individually owned). In order to retain management over those assets therefore each spouse will need to be a Trustee on the Trust.

There are circumstances, however, when it is advisable that only one spouse be appointed a Trustee on the Trust. If a trust is created for purposes of investing in property and the Trustees are married out of community of property, it is advisable that only the spouse with the greater income be appointed as Trustee. In this way any exposure attached to the signing of surety lies with only one spouse and the spouse who is not a Trustee is protected against such risk. Should the spouse who is a Trustee then be sequestrated the other spouse can then be appointed a Trustee in his/her place and thus keep control over the assets in the trust within the immediate family unit. Another instance where only one spouse is appointed would be in a Business Trust. Often in an ante-nuptial agreement business interests of the parties are excluded from the accrual. The way in which to exclude your business interests from a claim from your spouse in a trust structure is to not have your spouse appointed as a Trustee.

The trust structure can be an even bigger advantage if one is married in community of property. Due to the two estates being amalgamated into one, the assets of one spouse are the assets of the joint estate and more importantly the debts of one spouse are the debts of the joint estate. It follows therefore that if one spouse goes insolvent then so does the other spouse. By moving ones assets to the trusts they are therefore protected and one spouse, through a bad business decision or just bad luck, cannot influence the joint wealth as it is housed in the Trust. Furthermore, on death the estate is frozen during the winding up process. This process can, if it is a large estate, take up to 2 years to complete. During this period the surviving spouse and children have no or little access to the estate. This is made worse if one is married in community of property as the joint estate is frozen meaning that the surviving spouse’s assets are also frozen! If the estate is in Trusts then, financially, the death of one spouse has no impact on the surviving spouse and children because they have immediate access to the assets and cash held in the Trust.

In summary by moving ones assets into trust does not invalidate the marriage system between the spouses but because there are no assets left in the spouses’ personal capacity the system in which the spouses are married becomes irrelevant as any division of assets on divorce or death will be dealt with through the Trust and therefore governed by the Trust Deed itself and the Trust Property Control Act 57 0f 1988. Keep in mind however, if you are not a Trustee on the Trust you do not have any management over distributions and/or claims to the assets (or the use thereof) from the Trust.