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Bargain-basement asset transfers
FINANCIAL PLANNING
SHARE prices are sad and property values dismal, but there are two sparks of hope. Gold may yet prove its worth by regaining its safe-haven status in a troubled world, and the current low valuation of investment assets provides perfect timing for financial planning. Wealthy individuals face the perpetual problem of their riches being whittled away by tax: income tax and donations tax in their lifetime, and estate duty after their death. Smart planning can reduce the tax load. Many wealth-preservation strategies involve transferring individuals' assets during their lifetimes to a trust fund. A trust fund is a separate legal entity run by trustees, of which you are one, for the benefit of your chosen beneficiaries. Advantages are that your assets are protected from the taxman, creditors and other angry parties, and asset values are pegged at the transfer date. But transferring ownership of assets leads to costs: namely, transaction costs on the assets and, depending on how transfer is effected, tax. These costs will obviously be significantly lower if you transfer assets at a time when their market values are down. Neil Raubenheimer, general manager of BOE Private Bank, says timing is crucial when implementing an estate and financial planning strategy. And the current market climate is a window of opportunity. But any decisions you make now, he cautions, should be in the context of a holistic plan, taking into account your long- and short-term needs, risk factors, and commercial and tax exposure. So if you have been thinking of creating a trust fund as part of your long-term financial strategy, now may be the best time. When deciding which assets to transfer to your trust fund, consider two aspects: future growth in the asset's value, and transaction costs. Transferring fixed property is expensive. You can pay 10% transfer duty on the market value, and growth prospects may be bleak. "If for some reason this has to be done, then the current depressed state of the property market could make this an appropriate time," notes Raubenheimer. Assets like listed shares, cash and unit trusts are more commonly transferred into trust funds because they have potential for high future growth and they attract lower, if any, transaction costs. If you transfer shares you pay marketable securities tax of 0.25% on the market value. The most efficient way to transfer assets to a trust fund is to sell them to the fund and raise an interest-free loan in the fund's books. While the fund may owe you the money you need never call in the loan, or can slowly whittle it down, making use of the R25 000 annual exemption from donations tax. If you transfer assets to your beneficiaries without raising a commensurate liability, you will be liable for donations tax. This tax is payable at 25% of the market value of the assets, but is only payable after you have used up your R25 000 annual exemption. (Donations tax is not payable between spouses, but you could be smacked with income tax if the move is seen as income splitting.)
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