Generally speaking trusts have been an important component of estate planning – particularly for so-called high net worth individuals.
One of the major motivations in forming a trust was for the owner of growth assets to transfer his or her assets to a trust so as to avoid estate duty and capital gains tax on the growth of such assets should death occur.
Previously the transfer of assets to a trust was done via an interest free loan. However, following recommendations by the Davis Tax Committee, section 7c was added to the Income Tax Act whereby the founder of a trust would either pay donations tax on the value of assets transferred or be required to levy interest on the loan.
Whilst this amendment might appear to make the formation of trusts far more costly and therefore less attractive, trusts can still play a role in estate planning particularly if they are formed when individuals are relatively young and assets are transferred when first acquired at values much lower than that expected in future years.
A warning, though! As mentioned earlier, watch out for further changes regarding Estate Duty and how these could affect the formation of trusts.