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INSIGHTS
Growing a small business is a significant achievement, and as it flourishes, protecting that hard-earned wealth becomes a priority. One way to safeguard your business for future generations is by placing it into a trust. However, this decision is not one to take lightly, as it comes with both advantages and potential drawbacks.
At MMS Cloud Accounting, we want to ensure our clients make informed choices that align with their long-term goals. Here’s what you need to consider before deciding to place your small business in a trust.
The basics: what is a trust?
A trust is a legal arrangement where assets, such as your business, are held by trustees for the benefit of the beneficiaries, typically your family. While placing your business in a trust can offer significant estate planning benefits, it also involves surrendering control over those assets to the trustees.
Benefits of placing your business in a trust
Business continuity
One of the most significant advantages of placing your business in a trust is ensuring its continuity. The trust is managed by professional trustees, allowing the business to continue operating smoothly after your passing, without burdening your beneficiaries with complex business decisions.
If you anticipate that your business will grow significantly over time, placing it in a trust early on can result in substantial estate duty savings. As the business’s value increases, that growth remains within the trust and is not subject to estate duty upon your death. This can be particularly beneficial if the business is transferred to the trust when its value is relatively low.
Drawbacks of placing your business in a trust
When you transfer your business into a trust, you relinquish direct control over it. While you can still be involved in the day-to-day management as the managing director, significant decisions, such as selling the business, must be made by the trustees. This could lead to conflicts, especially if you and the trustees disagree on key business matters.
If you decide to sell your business later in life, you might miss out on the R1.8 million capital gains tax exemption that applies to individuals. This exemption is available if you own the business in your personal capacity and meet specific criteria, such as being over 55 years old. By placing the business in a trust, you forfeit this benefit, potentially leading to a higher tax liability when the business is sold.
Transferring your business to a trust may trigger immediate Capital Gains Tax, as the sale of the business to the trust is considered a taxable event. Additionally, if the trust purchases the business through a loan, the interest on that loan will accrue at a rate of prime plus 1%, potentially increasing your personal tax liability.
Weighing your options: Is a trust right for you?
The decision to place your small business in a trust should be made with careful consideration of both the benefits and the potential drawbacks. It’s important to assess your long-term goals, the anticipated growth of your business, and your willingness to relinquish control to trustees.
Get professional advice
At MMS Cloud Accounting, we understand that every business is unique, and there is no one-size-fits-all solution. Our team of experts is here to help you navigate these complex decisions, providing tailored advice that aligns with your business objectives and personal financial goals.
Before making any decisions, it’s crucial to consult with professionals who can guide you through the legal, tax, and financial implications of placing your business in a trust.
Contact MMS Cloud Accounting to discuss your options and ensure that you’re making the best choice for your business’s future.