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Tax concerns for trust management

By Staff Writer

Are you creating a new trust by amending the old one? If so, take great care because creating a new trust will attract CGT (Capital Gains Tax) as assets of the old trust are transferred to the new.

This is according to Wouter Scholtz, a director of Mazars Moores Rowland, the tax, audit and advisory firm who says a number of points must be considered before adding beneficiaries to any existing trust.

The first step to consider is whether an amendment will further the objectives of a typical discretionary trust established for the benefit of a particular family?  Or will the amendment be out of keeping with the founder's original objectives?

If an amendment contrasts with the founder's objectives, warns Scholtz, the amendment may well create a new trust.  If a new trust is formed the assets of the old trust will be disposed of to the new, and this will be treated as disposal of assets at market value and attract CGT under anti-avoidance rules.

"What's more" says Scholtz "any beneficiary of the old trust who had a vested interest in the assets, and was deprived of such a vested interest because of the amendments, may also be liable for CGT on disposed assets, or may also have CGT exposure."  

While it may be difficult to accommodate new beneficiaries without giving rise to the formation of a new trust, if trust deeds are drafted widely from the start to include a broad range of beneficiaries, the need for later amendments may be avoided or, at least, reduced, advises Scholtz.

Drafting such a provision is, however, a fine art, because trust deed will not comply with the requirements for a valid trust unless the criteria of identifying beneficiaries are clearly expressed. "You can't, for example, simply leave it to the trustees to name beneficiaries.  You must either identify beneficiaries by name, or by reference to a class of persons under which they may qualify."

With care and expertise it is possible to identify a trust's beneficiaries so flexibly that the need for a subsequent substitution or addition of beneficiaries at a later stage should never arise," says Scholtz.  

Scholtz says that trusts created before 1 October 2001 - the year CGT was introduced - must be reviewed to identify and limit CGT exposure. This is because trust deeds and testamentary trusts set up before this date may now attract CGT.

Scholtz further cautions that, following amendments to the Transfer Duty Act in 2002, an amendment to a trust that holds direct or indirect interests in residential property may attract transfer duty if there is any addition or substitution of beneficiaries under such a trust.

"This makes it very important to establish the beneficiaries of residential property trusts on a flexible basis, and avoid the need to redefine the beneficiaries at some later stage," Scholtz concludes.             

 

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