Everyone owning a business weighs up the scales of risk and reward on a daily basis. The only way to be successful is to ensure that you take calculated risks. Unfortunately from time to time, unforeseen circumstances do happen and could place your business and inherently y our own future at stake.
As a business owner, you are mostly faced with the following risks:
- Paying Tax on business revenue/profits
- Protecting assets from creditors and potential liquidators
- Paying Taxes at the time of death
Here is our solution:
1. Draft a Will
Ensure that you have a legal Last Will and Testament that is revised at least once a year. Passing on without a Will places enormous pressure on your loved ones, the last thing you want to happen in an already emotional time. A valid Will ensures the smooth transfer of your assets to your beneficiaries.
An already grim picture turns even worse when you have minor children and die without a valid Will. In this instance, your full estate will be transferred to the Guardians Fund. The Guardians Fund is a fund set up by the government and will administer the funds in your estate on behalf of your minor children until they reach the age of 21
2. Protect your assets from creditors
When you or your business is sued, creditors can attach your personal and business assets to the claim. Having a Trust own your assets instead of you personally, is one way of successfully protecting your assets from your creditors.
The following infographic depicts the structure that we advise on to ensure proper protection of both your personal as well as your business assets.
Our suggestion is that you have a Family Trust that will hold all your personal assets, an Operating Trust that will own your operating company as well as an Asset Holding Trust that in turn will own an asset holding company.
The asset holding company will then simply rent the assets to your operating company. Should your operating company find itself in financial difficulty, the business assets cannot be attached as they are not owned by the operating company. One would then simply liquidate the operating company, form a new operating company, and simply lease your business assets from your asset holding company, as was previously the case.
It is important to take note that there is a general time period during which your assets held by the trust might still be susceptible to attachment by your creditors. Generally, your assets that have been held in Trust for longer than 6 months should be safe, but still at the discretion of the Court. The fact that the Court consider is whether or not you have attempted to deliberately hide your assets from your creditors, hence our advice to not wait until the trouble has knocked at your door, but rather be proactive in your approach to risk management.
3. Legally minimize your tax bill
The taxes that you are liable for are taxes on the profits of your business, but also taxes that are payable on your deathbed, also known as deathbed expenses. These would include:
- Estate Duty
- Capital Gains Tax (CGT), and
- Executors fees
Running your estate in your personal name would not protect your estate from creditors or minimize any taxes or deathbed expenses. If your assets were however owned by a Trust, your personal estate would be worth very little (all the growth on the assets accumulated in the Trust) and your deathbed expenses would subsequently be very little to none.
- Estate Duty
As a natural person, estate duty is simply paid at a rate of 20% of the net value of your estate exceeding R3,5 mill. You are however in a position to legally bequeath your estate to the longest living spouse without paying estate duty. This will unfortunately only delay the payment of estate duty, as the tax will be levied on your combined estate value upon the death of the longest living spouse.
With a Trust, there is no estate duty payable.
- Capital Gains Tax (CGT)
A natural person pays capital gains tax at a rate of 25% of the gain made when disposing of an asset multiplied by his/her marginal tax rate. The maximum rate an individual can pay towards Capital Gains Tax is therefore 10% (40% x 25%).
When a Trust disposes of an asset it pays capital gains tax at a rate of 50% of the gain made multiplied by the tax rate for a trust, which is 40%. The maximum CGT rate a Trust can therefore pay is 20% (40% x 50%). A Trust can however elect to pass the Capital Gain onto its beneficiaries resulting in the beneficiaries paying tax in their personal capacities and not in the Trust. This means that you can enjoy the benefits of protecting your assets in the Trust and not pay more CGT than you would have had you owned the asset in your personal name.
An important note to keep in mind is that death triggers a CGT event, which means that you are taxed twice when you pass on, even if your beneficiaries decide to keep the asset. This might place significant liquidity strain on your estate as they will still have to pay the Receiver its Capital Gains Tax. If your estate is not liquid enough, your beneficiaries might have to sell the asset to simply pay for its taxes.
- Executors Fees
When you pass on the total net value of your estate is calculated, i.e. total assets less total liabilities equal net estate value. Executors fees are professional fees paid for the winding up of your personal estate and are calculated at a rate of 3,5% of the net value of your estate. It is therefore clear that the higher the value of your estate, the higher the executors fees your estate will have to pay.
As a Trust does not form part of your personal estate, it means that all your assets held in Trust are exempt from executors fees, saving you another 3,5% on deathbed expenses.
Which of our readers actually have a documented contingency plan in place for their business, and how does it differ from the above-mentioned suggestion?