|
Groups of investors normally organize themselves informally where they register the shares in the name of one person whom they trust, the responsible person. But have you thought about the potential problems associated with such an informal arrangement without a separate legal entity holding the assets?
The Invested
Assets or Shares:
What happens when the responsible person becomes
insolvent? All the assets of the group will form part of the insolvent estate and the members will become concurrent claimants along with all the other creditors. It will not help if the assets are transferred to another member just before insolvency because the Liquidator will be able to claim it back. The assets will also be placed under the jurisdiction of the Liquidator and the other members will not be able to trade the shares or transfer money out of the account until the insolvent estate is finally wound up. It may happen that concurrent creditors receive very little, or even nothing, from the insolvent estate. If the informal arrangement constitutes a partnership, the estates of all the partners are liquidated.
What happens when the responsible person gets
divorced? The assets will form part of the divorcee’s estate in terms of matrimonial property law, and the other spouse will be entitled to have it included for the purposes of any divorce settlement.
What happens when the responsible person dies? All the assets will form part of the deceased’s estate. The assets will be placed under the jurisdiction of the Executor and the other members will not be able to trade the shares or transfer money out of the account. The members will have a claim against the estate, but it could take up to 9 months or longer to wind up the estate.
A registered Trust provides a
solution to the above potential problems. The assets (shares) belong to the Trust,
protecting the assets of the other members (beneficiaries).
The Tax
Implications:
What happens to the profits and losses? Although the shares will be registered in the name of the trust, all the profits and losses will accrue to the beneficiaries in their respective participation ratios. This means that all the income tax and capital gains tax will be payable by the beneficiaries, probably at a lower tax rate (remember that a trust pays normal tax at a fixed rate of 40%, and the effective capital gains tax rate is 20% (double the rate applicable to a natural person with no primary exemption).
What happens with estate duty when a beneficiary dies? The trust is structured in such a way that each beneficiary’s pro rata interest in the trust assets will vest in his/her estate upon death. The pro rata assets will therefore form part of the deceased’s estate without affecting the assets remaining in the trust. The estate will pay estate duty before assets can be distributed to the beneficiary’s heirs in terms of his/her will or in terms of the law of intestate succession.
The profits and losses of the
Trust vest in the beneficiaries according to their respective participation
ratios. The beneficiaries therefore pay tax on the profits or deduct the losses
on an annual basis in their individual capacities. The tax rate may be
substantially lower than when all the profits are combined. The Trust may make
payments to the beneficiaries in order to pay any tax.
Other benefits
of a registered Trust:
For more information send an
e-mail to head@sanlamitrade.co.za
|
