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Wealth planning for beneficiaries of B-BBEE schemes

Feb 09 2017 18:33

Cape Town - If you qualify to share in a Broad Based Black Economic Empowerment (B-BBEE) scheme, there can be many pitfalls and better ways to structure your affairs than you may initially think, according to Theunis Ehlers of Citadel.
"To ensure that you maximise this opportunity, you would be wise to consult with the right professionals to guide you through the minefields that are inherent to wealth structuring and planning," said Ehlers.

He provided the following insights:

Structuring wealth by using a trust

There are many benefits to employing a trust to house the wealth that is created through a B-BBEE scheme.

The main reason is that the assets (shares or the right to the proceeds of the shares) are often transferred to the trust at a discount to what their true market value is. The true value is unlocked during the duration of the scheme, during which time the beneficiaries are “locked-in” and cannot dispose of the shares or the rights.

The end result, at the time when these rights vest, is that these shares or rights are often substantially more valuable than when they were first transferred to the trust.

Why are trusts beneficial for B-BBEE beneficiaries?

Assets are often transferred to a trust by way of a loan account. The reason for this is that, were you to transfer the assets by way of a donation, you would pay donations tax at 20% on the value of the assets. It is, however, important to consider the potential tax implications of interest free loans to trusts.

The trust “buys” the asset from you, but as the trust does not have any money to do so, it “owes” you the purchase price. This loan remains an asset in your estate, but the growth in the value of the asset will vest in the trust.

The reason why this is significant to beneficiaries of B-BBEE schemes is that the initial value of the assets (for instance shares) that are transferred to the trust are often substantially lower than the value of those assets when the scheme comes to an end. In other words, substantial wealth is created in the hands of the trust while the loan from the beneficiary is often worth a lot less.

The aforesaid is only possible if the benefit from the B-BBEE scheme is vested in the trust from the outset. It is, therefore, essential that you consult with the right professional when you consider participating in a B-BBEE scheme.

Pitfalls for B-BBEE beneficiaries

The value of the shares or benefits at the end of the scheme is often substantially higher than at the beginning. The effect of this is that substantial wealth is created during the scheme.

It, therefore, follows that the trust should actually be the beneficiary of the scheme throughout and not the individual. If the individual is the beneficiary and only wants to transfer the benefits to the trust at a later stage, the loan account would be substantially higher with the potential of substantially higher tax implications.

"We often find the beneficiary of a B-BBEE scheme 'promised' to pay someone an amount of money once the scheme comes to fruition. The problem that arises is that should you pay an amount to another person without receiving something of similar value in return, you would need to pay donations tax at 20% of the amount that you paid over," said Ehlers.

"Where someone contributed funds to enable a beneficiary to participate in the scheme, it is essential that the understanding between them is properly structured in an agreement. The reason for this is that the legal nature of the agreement and the rights created therein will determine the tax implications of the transaction and who will be liable for it."

Structuring your wealth through a trust will ensure that the structure (trust) lives on after your death and your wealth will continue to be managed for the benefit of your beneficiaries and descendants.

Read Fin24's top stories trending on Twitter:

trusts  |  bbbee  |  wills  |  money

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