Trusts can be extremely useful tools in estate and tax planning (and for protection of your assets from life’s misadventures), but they come with a health warning – assets held in a trust now belong to the trust, and no longer to you personally.
A perfect example of how things can go wrong in this regard is provided by a recent Supreme Court of Appeal case.
The medical damages claim
- A company director had sold his shares and loan account in a company to his family trust.
- About to undergo a back operation, he suffered a failed intubation by an anaesthetist, which left him in intensive care for a month, then bedridden, incapacitated and ultimately suicidal.
- His consequent neglect of the company’s affairs, until his recovery some two years later, led to him suing the anaesthetist for damages, including R1.6m for “loss of income and earning capacity”.
The health warning
The anaesthetist accepted liability for whatever damages could be proved, and was duly ordered to pay damages for past and future medical expenses and for “general” damages (a technical term for non-monetary losses like pain and suffering, emotional hurt etc).
But the director failed in his loss of income claim, the Court holding that “the separateness of the trust estate must be recognised and emphasised, however inconvenient and adverse to [the director] it may be.” He could not benefit both from a (legitimate) reduction in estate duty and also “the continued retention of control and advantages of ownership of the trust assets”. Accordingly he had failed to prove any personal loss of income and earning capacity.
The message is clear – dispose of your assets to a trust only if you understand the full consequences as well as the benefits. Take advice in doubt!
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