YOUR MONEY: Which is better for securing your heirs’ wealth: a trust or a company?

Thanks to Graeme Körner for his information on how to set up a share portfolio for your heirs. My question is: which structure of the two is more efficient for providing seamless continuity of the share portfolio — a trust or a company?

A trust looks like the obvious answer because of the potential benefits in terms of estate duty and capital gains tax (CGT), but I get the impression that trusts have become the next punching bag of the South African Revenue Service (Sars). 

So is a company not perhaps a more efficient structure?

For example, if I am the only shareholder (holding 100% shares) of a share portfolio in a company, and I intend to bequeath it to a specific family member or person, will it not be more efficient to give such person a minority shareholding (say, 1%) in the company and let a shareholders’ agreement determine the process after my death?

What I am not sure about is this: can the price be fixed at, say, R1 a share times 99 available shares equals R99 for all the shares, or is it obligatory for Sars to approve a valuation of shares held by the deceased at the time of death? 

And is estate duty still payable in the above arrangement, as the remaining shareholder becomes the only shareholder and continues with the running of the company — or is securities transfer tax payable on R99 or on the valuation as determined by the Sars commissioner?

If such an arrangement is possible and legal, I assume it will have to form part of one’s final will and testament, or does the shareholders’ agreement take precedence over a will?

— Dirk

Answer: 

Upfront, we must stress that fiduciary planning is a very personal thing, unique to a family, and that there is no single right structure.

Dirk is correct that trusts are receiving considerably more regulatory (and tax authority) attention. So which structure is better? 

We would generally recommend company structures rather than trusts to actually hold assets, with a trust possibly owning the shares in the holding company (holdco). We would also typically, when viable, recommend a holdco and operating company (opco) structure, where the holdco is “banker to the group” and the shareholder, not necessarily with 100%, and the opcos hold the actual assets. 

Companies offer a number of advantages over trusts, including lower tax rates and complexity, simpler administration and regulatory burdens, greater flexibility, the ability to receive dividends without holding tax, and ease of partnering with others in assets or structures.

Considerations when choosing a structure will include: 

• The likely duration of the structure;
• The domicilium (residency and tax residency) of the family; 
• The quantum of funds. A very large estate (for example of R 100m) could justify the costs of a multilevel structure;
• Tax legislation. While trusts currently allow the conduiting of income and gains to beneficiaries (under the conduit principle), this could change in the future; and 
• The investment focus and the nature of the underlying investments (in other words, what is owned).

A company-only structure in which Dirk is the shareholder will have tax and other implications. 

Sadly, it is not possible to transfer the shares in the portfolio holding company at a nominal value, as section 5(f)bis of the Estate Duty Act provides that unlisted shares must be valued at a realistic value at the date of death, effectively requiring the approval of Sars, based on a professional valuation, for the transfer. 

It is also important to note that the transfer of the shares in the company (to a new shareholder or trust) would trigger a CGT event. The shares in the company would be included in Dirk’s estate and be subject to estate duty.

There is not much scope to manage these matters quickly once the structure exists. It is, however, possible to minimise their effect when first establishing the structure.

Let’s illustrate an example. Dirk wishes to invest R5m in a portfolio and has decided to hold these shares in a company. He wants his son, Junior, to inherit this wealth.

It may be preferable for Dirk to lend the R5m to the company, in which Junior is a 100% owner. Note the company (at inception) has no real value, as the loan and the cash in the bank offset each other. As such, the growth in the value of the company over time will effectively have the wealth transferred to Junior. 

It may be appropriate for Dirk to establish a new company, and to vest ownership in a trust or in his ultimate (planned) beneficiary (in this case Junior). This company could be progressively built by loans from Dirk, for example as he sells assets in his current portfolio. 

We have not unpacked the shareholder agreement issue, as the transfer of shares at a nominal value is not practical. A buy-and-sell agreement could be used. 

We trust that we have provided Dirk with enough to make a more informed decision, but we invite him to contact us directly should he require additional assistance. 

— Graeme Körner and Nico Banda, KP Fiduciary Solutions  

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