Trusts and Estates

Download as pdf or txt
Download as pdf or txt
You are on page 1of 21

TRUSTS AND ESTATES (Sec.

80 – 84)
INTRODUCTION

 A trust
oIs a legal arrangement in which the grantor/settler
transfer property to a trustees for them to manage for
the benefit of a third person (the beneficiary).
oIt has developed as a special, flexible gift of property to
trustees not just for the benefit of existing adults but for
infants and for future unborn beneficiaries.
oAs such trusts can be used to used to preserve a
family wealth by minimising, for example incidence of
taxation or the risk of dissipation by a spendthrift heir
INTRODUCTION OF TRUSTS
oUnlike a company, it does not have a legal
personality, i.e. it cannot sue or be sued or own
property, instead it is the trustee who can do all
these.
oTrust is neither a holding company, a contract or
a will but may arise by virtue of a will, contract or
created by a company
oIt is a legal relationship defined by a document
known as trust deed or trust agreement.
IMPORTANT DEFINITIONS
 Trustee is defined in Sec.3 to include the following;
o An executor, administrator, tutor, or curator; and
oA liquidator or judicial manager; and
oA person having or taking on the administration
or control of property subject to a trust; and
oA person acting in a fiduciary capacity; and
oA person having the possession, control, or
management of the property of a person under a
legal disability.
IMPORTANTDEFINITIONS

 Grantor (settler)
oA person who transfers property to, or
confer a benefit on, a trust for no
consideration or for a consideration which
is less than market value of such a
property
GRANTOR (SETTLE) TRUST
 Grantor trust
o It is a trust in which the grantor has retained control over the whole or part of the
corpus (is the sum of money or property that is set aside to produce income for a named
beneficiary) or income of the trust
o It is the trust in which the grantor has a power (either in whole or in part) to
revoke(end) the trust so as to acquire a beneficial interest in the corpus or income of
the trust which is exercisable at any time.
o It is the trust in which the grantor has the power to alter the trust so as to acquire a
beneficial interest in the corpus or income of the trust.
o It is also the trust in which a grantor has a reversionary interest in either the corpus or
income of the trust

• NB: This power may be expressly provided in the trust deed or


arise by operation of the law.
QUALIFIED BENEFICIARY TRUST

 Qualified beneficiary trust


oIs a trust in relation to which a person has
a power solely exercisable by that person
to vest(who is given the legal right over)
the corpus or income in that person.
oIt is also a trust whose sole beneficiary is
an individual or an individual’s estate or
appointees.
PRINCIPLES OF TAXATION FOR TRUST (sec.81)
 For tax purposes, a trust is a separate taxable entity and it
includes the estate of a deceased person but does not
include a grantor trust or a qualified beneficiary trust
 Though treated as separate taxable entities, they are not
liable for tax on their incomes, tax liability for trust chargeable
income lies with the trustees and/or beneficiaries of the trust
 Principles of trust is similar to taxation of partnership to a
certain extent, as trust income is taxed either to the trustee
or beneficiary.
 However trust is required to file the return of its income as
per section 128
PRINCIPLES OF TAXATION OF TRUST
 Determination of who is the tax payer in respect of trust
income is of paramount importance as different rates apply
depending on the type of tax payer
 A beneficiary is taxed on the trust income if he or she is
presently entitled to it, while the trustee is taxed on the
accumulated trust income.
 Resident individual beneficiary who is not a minor is taxed at
marginal rates and non-resident beneficiary at 25%
 Trustee is taxed at 30%, with exception for the first two years
of assessment of execution of a deceased estate.
PRINCIPLES OF TAXATION OF TRUST

 Two exception to the general rule of taxing


trust income either to beneficiaries or
trustees;
oIf it is a grantor trust or
oIf it is a qualified beneficiary trust
PRINCIPLES OF TAXATION OF TRUST
 Taxation of a grantor trust
oIt is not a separate taxable entity from the grantor
oAll the income of the trust is treated as being derived
by the grantor and assessed to the grantor,
oThis should be the case even if there is a beneficiary
who is entitled to that income,
oThat is the beneficiary will not be taxed on that income.
oAs a result any transactions between a trust and a
grantor are ignored for tax purpose
PRINCIPLES OF TAXATION OF TRUST

 Taxation of a qualified beneficiary trust


oIt is also not treated as a separate entity
from the beneficiary
oTrust income is taxed to the beneficiary
regardless of whether the beneficiary is
presently entitled to the income or not.
CALCULATION OF TRUST CHAREABLE INCOME
 As with partnership, what is calculated is notional chargeable income for
the liability to be allocated between the trustee and beneficiaries.
 The trust chargeable income is calculated as if it was a resident individual
whose world wide income is subject to tax in Lesotho, but disregarding the
following;
o Interest exemptions under sec.27 and exclusions under sec.158
o Personal tax credit as per section 73 (but considered at beneficiary level)
 Unlike partnerships trust losses are not allocated to beneficiaries but may
be carried forward to the next year as deductions against the income of the
next year
 Each trust should be treated separately even if more trusts have common
or similar trustee.
TAXATION OF BENEFICIARIES (Sec. 82)
 Beneficiaries are liable to tax on their share of trust
income to which they are presently entitled to.
oThe beneficiary is regarded as presently entitled to
trust income where the beneficiary;
oHas an absolute and unchallengeable vested
interest in possession in a share of income and
oHas an immediate right to demand payment of that
share of income.
TAXATION OF BENEFICIARIES (Sec. 82)
 Resident beneficiary
o Is taxed on the world wide share of trust income to which he is presently entitled to at
marginal rates

 Non – resident beneficiary


o Is taxed on Lesotho source share of trust income to which he or she is presently
entitled to at standard rate (25%)

• NB: no beneficiary can claim a deduction for trust loss.


TAXATION OF TRUSTEES (Sec.83)
 Are taxed on the trust income on which no beneficiary is
presently entitled.(referred to as chargeable trust income)
 Trustee is liable to tax on Lesotho source trust income,
 And also on trust foreign source income provided;
o The grantor was resident of Lesotho at the time of time of making the transfer to the
trustee
o The grantor was a resident of Lesotho in the relevant year of assessment
o A resident person may ultimately benefit from the income

 The trustee will then be allowed a credit for any foreign taxes
paid in respect of taxable foreign income.
TAXATION OF TRUSTEES (Sec.83)
 Chargeable trust income is calculated as = trust
income LESS part of it to which beneficiaries are
presently entitled to(both resident and non-resident
beneficiaries, regardless of the tax implication to that
income).
 Chargeable trust income of a trustee is taxed at the
rate prescribed in the fourth schedule which is currently
30%
CIRCUMSTANCES IN WHICH TRUSTEES ARE TO BE CHARGEABLE
TO TAX ON THE TRUST’S FOREIGN SOURCE INCOME.

 Where the grantor was a resident of Lesotho at the time of


making a transfer to the trustee.
 Where the grantor was a resident of Lesotho in the relevant
year of assessment.
 Where a resident person may ultimately benefit from the
income.
TAXATION OF ESTATE OF THE DECEASED
PERSONS(SEC.84)
 The executor or administrator of the estate of the deceased
person is liable for tax on the estate (income) of the deceased
 Income up to the date of death
o Is taxed to the administrator as trust income at marginal rates if the deceased was a
resident individual
o Personal tax credit is to be pro-rated where possible
o Taxed to the administrator as trust income at 25% if the deceased was a non-resident

 Income arising after death of the deceased


o It is also taxed to the administrator as trust chargeable income at;
• Marginal rates (or 25% if deceased was a non resident)
in the year of death and the following year of
assessment
• 30% thereafter
TAXATION OF ESTATE OF THE DECEASED
PERSONS(SEC.84)
•NB: Income is chargeable to the
executor of deceased taxpayer on the
basis that no beneficiary is presently
entitled to the income and no beneficiary
is taxed on the trust income
Thank You
End of Chapter

You might also like