The use of Trusts to conduct a business has become a popular trend to dodge or minimise tax on assets. Trusts are arguably the most efficient entity towards tax advantages.
You can use a Business Trust as a medium for conducting a trade or business. The assets of such a Trust purely serve business purposes. The beneficiaries share the profits.
Choosing to set up a Business Trust can also give you certain protections and advantages that other legal entities don't enjoy. Today, we take a look at them.
Vesting Trust vs. Discretionary Trust
You can set up vesting or discretionary Trusts.
In a vesting Trust, the beneficiaries have absolute rights to either income, capital or both. They don't own it, but have a right to claim the delivery of the income or capital.
A discretionary Trust is where the trustees decide if the beneficiaries will receive income or capital or both. The beneficiaries enjoy only thehope of benefiting from the Trust. Until the income or capital of the Trust vests in the beneficiary, they aren't entitled to it.
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On 1 March every year the Tax laws change
And you need to make sure you implement the changes correctly, so you don't make mistakes and cost your company money.
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Six advantages of trading under a Business Trust
1. It shields your assets from creditors. The assets of the Trust belong to the Trust alone. This means that creditors can't come after you and claim against the Trust as part of your personal assets. Through a Trust, your business is never at risk.
2. Maintaining a Business Trust is cheaper than to maintain a company. For example, a Trust is not legally required to hire an auditor. Audits on a company are compulsory but they take up time and money. Trusts don't need to disclose statements orpay annual fees to the Registrar.
3. Taxes related to Trusts are less complicated when it comes to Income Tax, Capital Gains and the various documents that have to submit to SARS, for example.
4. Business Trust is not subject to estate duties, Vat or Capital gains Tax when the estate is wound up. This is important because it affects what you leave your heirs. Most businesses implode after generation because of 'death taxes'.
5. Trusts are flexible as business owners. You can add or remove new partners and beneficiaries, according to what the Trust deed specifies.
6. The tax rate for Trusts is a flat rate. Though it may seem high at rate of 40%, what's important is that it's constant. In a company, you pay through your ears in taxes. There are compulsory taxes left, right and centre.
Choosing to run your business as a Trust could be the best thing you ever do.
It ensures continuity of your business but most of all, limits estate duty and other taxes.