Should my shareholding in a company or member’s interest in a close corporation be held in trust?

Being a shareholder in a company or member of a close corporation does not come without responsibility or risk.
Under legislation every member, shareholder or director who controls or is regularly involved in the management of the company/ close corporation and/or overall financial affairs can be held personally liable for any VAT, PAYE, UIF, additional tax, penalty or interest for which the company/close corporation is liable.

This provides SARS with a powerful tool as it imposes personal liability in certain instances, on shareholders/ members and directors for what is, in reality, a liability of the company.
Apart from the above, the value of the interest in the company or close corporation is also a capital asset in the estate of the shareholder or member, if same is owned in his/her personal name. This means that the creditors of any shareholder/member can attach his/her shareholding/member’s interest in settlement of any debt outstanding. It follows therefore that the debts of an individual can put the company/close corporation at risk. If the shareholding/member’s interest is held by a trust, because the debts of the individual are not that of the trusts, the company is not exposed. Furthermore, when declaring dividends, the monies flow to your trust and not your individual estate further protecting you as any monies held by the trust does not vest in you and is again not attachable by creditors.

On death all assets in your personal estate attract taxes and estate administration expenses which could add up to a substantial amount, such as:

a.   Capital Gains Tax (CGT)
At death you are deemed to have disposed of all assets at the market value of the assets on the day before you died. The difference between the market value and the base cost (value of assets when acquired or value as at October 2001) could result in a capital gain, taxable at 13.3% of the total gain, taking into account certain exclusions provided for in the Income Tax Act.

b.    Estate Duty
Estate duty of 26.6% is payable on the dutiable estate.

c.    Executors Fee
An Executor is entitled to a fee of 3.5% (plus VAT) on the gross value of the capital assets at time of death.

If, however, you do not personally hold the shareholding/member’s interest then the aforementioned death expenses and taxes cannot be imposed in terms of your shareholding and or member’s interest.
There is no difference in the tax payable by having a trust own the shareholding. 28% is payable on any profits and on declaration of dividends the now dividends tax of 13.3% is payable. If you were to have your trust own the shareholding/member’s interest the same tax would apply.

It is therefore evident that the only tool in which to hold your shareholding and/or member’s interest is a trust.