Yesterday I said that I belief you should have enough cashflow and some knowledge before you form a trust. Let’s rephrase: If it is a property or a trust, go for the property. Property will eventually help you to get a trust, not the other way around. If you have the money, you buy the expertise you need to have a trust!
So what are the disadvantages of a trust?
First of all a trust costs money to form. You have to pay lawyers and other admin costs. That is only a problem if your cashflow is under pressure. And once again, I would rather use the money to buy a property if it is an either-or situation. This is a once-off expense.
Secondly a trust costs money to run. You need an accounting officer to do the accounts and to do the annual financial statements. This is a cashflow expense. And don’t forget the banking fees, which is also very high.
The same accounting officer should preferably do the tax returns. That is part of the previous expense.
There are many administrative and legal requirements for trusts. That means you need some knowledge or guidance, which you can acquire or buy via an expert.
Trusts have a high tax rate. The income tax rate is very high as is the capital gains inclusion rate.
All the above are obviously not reasons NOT to have a trust. But it does mean that you need some cashflow and some knowledge. And that is why I think many people invest in trusts when they should not really be doing it (yet).
The benefits of a trusts are the following:
Trusts are excellent estate planning vehicles. Since a trust is a totally separate entity, it owns the assets. So whatever assets belong to the trust does not form part of your estate. (An important fact to remember.) Because the assets do not form part of your estate, your estate does not pay executor’s fees or estate duty on assets in the trust. Death is a capital gains tax event, so at least in a trust you can decide when you want to pay capital gains tax. You control selling, but mostly not death!
You can reduce income tax payable by distributing income to trust beneficiaries who will then pay the income tax.
Trusts offer continuity. In other words, having assets in a trust means that your descendants will benefit from your planning far into the future, perpetually. Because of all the costs of dying, an estate is over time decimated. Not so with a trust, because death does not influence the trust. Also, because the assets are in trust, is does not have to be transferred and divided.
Think of this example. You have a very nice holiday home at the beach and 3 children. They inherit equally. Now they each have 2 children, who inherit equally. Then each grandchild – eventually the shares are so small, it is indivisible, over and above all the cost of transferring it all the time. In a trust, it is not a problem.
Trusts offer protection against creditors and divorce. It offers protection to your children against unscrupulous spouses.
So, all in all, I really like trusts. But I don’t think every investor needs a trust before he can start investing.
What do you think? Do you (dis)agree? Any questions? I feel good today, so I will answer if I can, just post it!
Tags: Financial Planning, Property, Trusts