Welcome

.

ESTATE PLANNING

A LEGACY OR A LIABILITY?

TRUSTS

Legal nature of a trust

• A Trust is NOT like a company or cc.• A Trust does not posses a legal personality.• A trustee, in his legal capacity, is regarded as a

separate entity.• Section 1 of the Income Tax Act defines a trust as

a “person”.• Trust has the structure of a stipulatio Alterii.• Inter vivos trust is an agreement and all the rules

of the law of contract apply.

Benefits of a Trust

• Ensures the smooth handover of assets from one generation to the next.

• Cares for assets for those who are unable to look after the assets themselves.

• Preservation of wealth– Example: a farm or holiday house passed

from one generation to the next – EDT and CGT.

Benefits of a Trust• Reduction of death duties which are made

up of :-– Deemed CGT– Exec fees– Estate duty tax

• Protection of assets from creditors.

Benefits of a trust

• Income tax, Capital gains tax and donations tax:

– Donations tax.

• If a natural person makes a donation greater than R100k then donations tax.

• From a trust then no donations tax.

– Income Tax and capital gains tax in the trust – discuss at a later stage.

Disadvantages of a trust

• In order for a valid trust to come into existence the donor must hand over ownership and control to the trustees.

• The trustees become owners of the asset.• Decision making is now made in terms of the deed

and not by 1 trustee ie the original donor.• Costs: Banks normally charge between 1 – 2% of

capital.

Inter Vivos v Testamentary

• Pro-active planning v Re-active planning.

• Testamentary trust is more ridged and it cannot be altered.

• IV Trust is normally open ended with regards to vesting date whereas a TT usually has a fixed vesting date.

Role of independent trustee

• Now required after decision of Land & Agricultural Bank v Parker.

• Shouldn’t just appear in name.

• Must be party to all decisions and should attend all trustee meetings.

• His/her conduct could show if the trust is a bona fide trust or a sham.

Roles and duties of a trustee• Ensure that the trust property is adequately

insured.• Funds are properly invested by measuring fund

managers performance to approved benchmarks.• Determine the short, medium and long term

income and capital needs of the beneficiaries.• Ensure that the provisions of the trust deed are

complied with and upheld at all times.• Ensure that all the trusts’ statutory requirements

are complied with.

Roles and duties of a trustee• Prepare and maintain a trust asset register

(investments and fixed assets).• Conduct trustee meetings annually, bi-

annually or quarterly.• Record minutes of the trustee meetings and

investment decisions.• Maintain and safe keep the minute book.• Ensure loan agreements are kept.

Problem clauses in trust deeds

• Dynamic document that must be reviewed regularly. Tax laws and trust laws change.

• Experience at least 9 out of 10 trusts either have wrong clauses or are missing clauses.

Examples• The trust deed is drawn up in such a way that the trustees are subject to the

control of the founder in exercising their duties. The result is that, although the founder gives up control in form, in substance this is not the case.

• i) “The trustees have the authority to nominate and appoint additional trustees of their own choice subject to the following:

– During his/her life Mr A has the exclusive right to nominate trustees for the trust of his choice or to remove trustees at his discretion.”

• The mere fact that a founder has the right to appoint or remove trustees should not in itself indicate that the founder/donor never intended to give up control of the trust assets. As long as the appointment is in the best interest of the beneficiaries, and not to protect the interests of the founder/donor, then the substance of the trust should not differ from its form.

Examples• “Notwithstanding anything to the contrary herein

contained, for as long as Mr B acts as a trustee he shall be entitled to veto any resolution proposed by the trustees.”

• Where the veto right is structured positively in the sense that one of the trustees (who is also a beneficiary) can overrule the rest then this will have negative implications with regards to income tax, capital gains tax and estate duty tax.

Examples

• “All resolutions by the trustees will be taken by a majority vote provided that the vote of Mr B is one of the majority votes.”

• Where the right is structured as a ‘negative veto right’ it appears as if this right does not bring section 3(3)(d) or section 7(6) and section 71 into operation.

Example• “Mr C has the right to act alone in all matters

concerning the trust without consulting the other trustees.”

• Once again this veto right is positively structured in the sense that one of the trustees (who is also a beneficiary) can overrule the rest. This will have negative implications with regards to income tax, capital gains tax and estate duty tax.

Example• “ It is determined specifically that Mr D will have the right

to, in his will, prescribe the formula for the distribution of Trust assets amongst the principal beneficiaries at the termination of the trust, and this indicates which part of the assets will go to which beneficiary and these allocations need not be equal in size, value or extent.”

• If Mr D is the donor/founder, trustee and also a beneficiary (especially a capital beneficiary) then it appears as if this clause falls within the scope of section 3(3)(d).

Example• Testamentary clauses often have the following supplementary clauses

added to neutralize the estate duty tax implications.• “Notwithstanding anything else to the contrary stated in this deed, no

trustee shall at any time qualify as an income or capital beneficiary of this trust or receive any benefits as such for so long as he is competent to dispose of trust property for his own benefit or for the benefit of his estate in the spirit and wording of section 3(3)(d) of the estate Duty Act No 45 of 1955 or any later amendment thereof.

• “The reservation of the testamentary power shall never be interpreted in such a way that the conclusion be drawn that the donor/founder/trustee (who is given the right) has the right to allocate the trust income or capital to himself or his estate.”

• Although the above clauses will neutralize the estate duty implications they do not have the same effect with regards to the income tax and estate duty tax implications.

Getting assets into a trust

• Donate but will attract donations tax at 20%.

• Interest free loan.

• Bequest in terms of a will.

Taxation of Trusts

• Income tax and capital gains tax.

• Distribution to beneficiaries – Sect 25B & paragraph 80.

• Attribution – Sect 7 & para 68 – 72.• Taxation in the trust at 40% and 20%

CGT.

Inter Vivos TrustsTaxation of trusts.

– Income tax

• Income is taxed in the hands of the trust at 40%. No rebates are granted.

• Income is distributed to the beneficiaries and taxed in their hands at their tax rates. Income retains it’s identity.

• Opportunities through distribution i.e. university fees for children and school fees for grandchildren.

• Attribution of income to the donor.

Example• Ian and his wife Leigh-Ann have 3 children, namely

Lisa 20, Paul 18 and Greg 16. Ian and Leigh-Ann are both employed and both earn in excess of the maximum marginal rate of 40%. Lisa and Paul are both at university and have no source of income and Greg is still at school. In order to minimise his death duties and on the advise of his tax advisor Ian established an inter vivos trust. He transferred R5 million in cash and other growth assets to the trustees and they in turn invested it in various portfolios. At the end of the financial year the trust had earned R120,000 in taxable interest income.

Example continued …• The trustees can distribute income to Lisa and

Paul as they are both over 18. They would each receive R60,000 which they need to declare in their tax returns. Owing to the fact that they receive no other income their tax liability would each be R0. Both Lisa and Paul can now use these funds to pay for their education.

• There is now no need to distribute to Ian or Leigh-Anne or to retain the income and tax it in the trust.

Inter Vivos TrustsTaxation of trusts cont …– Capital Gains Tax

• Gains are taxed in the hands of the trust at 20%. No rebates are granted.

• Gains are distributed to the beneficiaries and taxed in their hands at their tax rates. Maximum rate would then be 10%.

• Attribution of gains to the donor.

Trusts and your will• Don’t take it for granted that you can

automatically bequeath assets to your IV trust. If the definition of beneficiaries are too wide the bequest could fail Braun v Blann & Botha.

• Leaving the primary abatement to an IV trust.• Nominating a replacement trustee.• Great opportunity to transfer fixed property as

there are no transfer duties.• Section 9(4) of the transfer duty act.

Inter Vivos TrustsConclusion– Ensure that one of the trustees is independent.– Ensure that your trust deed is “compliant” with

current legislation and case law.– Ensure that all the statutory requirements are

complied with i.e. trustee meetings, minutes of all decisions etc.

– Ensure your will “compliments” your trust.– Remember, both are dynamic documents and

should be reviewed on a regular basis!

WILLS

When should your Will be reviewed?

• At least every two years.• If you have children/grandchildren.• If you have offshore assets.• If you get re-married/divorced.• On the death of a spouse.• If there are amendments to the tax act.• If you have implemented any other form

of estate planning such as a trust.

Requirements of a valid Will

• Must be signed in the presence of two witnesses (older than 14).

• Must be dated.• Each page must be signed by the testator/trix.• Must be signed in the presence of two witnesses

who do not benefit from the will and they, in turn, must sign in the presence of the testator/trix and each other.

Death duties in the estate• There are 3 major ‘death duties’ in every estate,

namely:• Executors fees: Normally levied at the official

rate of 3,5% + VAT. These are levied on the gross value of assets which the executor must administer.

• Capital gains tax. Calculated up to 10% depending on the nature of the asset.

• Estate duty tax: Calculated at 20% of the dutiable estate > R3,5m

Why is a Will important?

• With no valid Will you will die intestate.

• Dying intestate will lead to unintended consequences with regards to– Assets not benefiting the intended people– Death duties– CGT– Appointment of Executor/s of choice

Example of dying intestateMr Jones passes away without leaving a valid Will. He leaves behind his wife Mary, his son Paul who is 18 and his two minor children. His estate after all liabilities and administration costs is valued at R10 million. He was married out of community of property excluding accrual.The distribution of his estate including death duties will look as follows:

Example of dying intestate cont..• R10 Million is divided by 4, with a spouse

entitled to a Child’s share or R125,000, which ever is the greater.

• Estate Duty would be as follows:Total estate value R10,000,000

Less S 4q R2,500,000

Less abatement R3 500 000

Total estate Duty R4m x 20% = R800k

Dying intestate cont..Mr Jones

MaryR2,3m

PaulR2,3m

Minor 1R2,3m

Minor 2R2,3m

Guardians Fund

Guardians Fund

Government run

Total estate duty cost = R800k

Example of dying intestate cont..• Minor’s portion to Guardians fund.• A correctly drafted Will would have:

- reduced estate duties.

- reduced CGT.

- and would have better catered for the maintenance of a surviving spouse and minor children.

Example of efficient planning Mr Jones passes away and leaves R3,5m to his

children and the residue to his wife Mary. The Will makes provision that if children are under 18, their share will be held in Trust. His estate after all liabilities and administration costs is valued at R10 million. He was married out of community of property excluding accrual.

The distribution of his estate including death duties will look as follows:

vs efficient planning cont..Mr Jones

MaryR6,5m

PaulR1,17m

Minor 1R1,17m

Minor 2R1,17m

Testamentary Trust

Total estate duty cost = 0 Testamentary Trust

Example of efficient planning

• Estate Duty would be calculated as follows:Total estate value R10,000,000

Less S 4q R6,500,000

Less abatement R3 500 000

Total estate Duty R0

Types of planning in a Will

• Simple will using the spousal relief:– Residue of estate is bequeathed to the

surviving spouse.– Estate duty tax and capital gains tax are

deferred until the death of the surviving spouse.

– Only surviving spouse would benefit from the R3,5 million abatement.

Impact of basic planning Mr & Mrs Smith each have an estate of

R3,5m. If they leave everything to the survivor and the survivor passes away shortly afterwards, only the survivors estate would be subject to the R3,5m abatement i.e. estate duties payable would be 20% of R3,5m = R700 000.

Types of planning in a Will• Advanced planning:

– The primary abatement of R3,5 million is bequeathed to an inter vivos trust or a testamentary trust and residue to spouse.

– This will save death duties in the surviving spouses estate.

– Total saving amounts to • 20% x R3,5 million = R700,000 (plus savings on growth

of investment)

• 3,99% x R3,5 million = R139,650

Example of abatement planningMr Smith

TestamentaryTrust

R3,5mLess (S 4A) R3,5m= 0

Mrs SmithR3,5m

Beneficiaries: Mrs Smith &

Children

Death Duties: R3,5m(R3,5m)

0

R3,5m

Types of planning in a Will

• Use of the primary abatement can also be used in a foreign Will.

• Benefits:– Make use of the tax free abatement.– Creates a tax shelter for these assets offshore.– Provides a vehicle to protect assets.

Separate Wills for foreign assets• A valid South African Will is recognised in most

foreign countries, but certain countries probate system do not accept our freedom of testation, for example Greece.

• A South African executor is prohibited from winding up assets outside S.A.

• Potential lengthy procedures if foreign assets must be dealt with in terms of a S.A. Will.

Separate Wills for foreign assets• Benefits of a foreign Will are:

– Separate administration of the estate carried out in parallel to the administration of the SA assets.

– An executor familiar with the procedures required in those territories can save time and therefore costs.

– An opportunity for early advice on any potential taxation and succession dangers.

Separate Wills for foreign assets

• It is vitally important that where more than one Will is in existence that both documents dovetail together and do not have the effect of revoking one another!

Usufructs in Will planning

• What are their drawbacks?

– The base cost for CGT becomes the very low Bare Dominium value.

– They are extremely restrictive.

– They may lead to incorrect investment decisions.

Example of usufruct

Mr Y leaves his estate of R10m to his children, subject to a lifelong usufruct in favour of his wife Mrs Y (65 years old).

Usufruct Value: R10m x 12% x 6,8109(PVF) = R8 173 080

Bare Dominium value = R1 826 920

Example of usufructMr Y

R10m estate

ChildrenValue: R1,827m

Mrs Y (65)Value: R8,173m

Base Cost = R1,827m for CGT

Asset invested in cash,Children have to agree

to any investment decisions

Bare Dominium Usufruct

Example of usufruct cont...• Base cost for children is R1 826 920 an increase

in CGT of at least R817 000.

• Mrs Y only wants the funds invested in cash as she is only entitled to income and can’t benefit from capital growth.

• Mrs Y’s children would have to agree to any changes that she may want to make with the portfolio.

ESTATE DUTY AMENDMENTS

Abatement portability• New legislation comes into effect on

1/1/2010.

• ‘To the extent’ principle is now applicable.

• Is there still a need for the use of inter vivos or testamentary trusts in a will?

Example• Mr Smith has an estate of R3,650m and

Mrs. Smith has an estate of R3,5m.

• Mr Smith passes away bequeathing his entire estate to Mrs Smith.

• Mrs Smith generates a 7% return on her assets and survives Mr Smith by 10 years.

• Is there scope for an inter vivos or testamentary trust?

No trust is used• Value of Mrs Smiths estate in 10 years

= R14m.

• Executors fees @ 3,5% + VAT

= R558,600

• Estate duty tax

= R1,288,280

• Death duties (excl CGT) = R1,846,880

Trust is used• Value of Mrs Smiths estate in 10 years

= R7m.

• Executors fees @ 3,5% + VAT

= R279,300

• Estate duty tax

= R644,140

• Death duties (excl CGT) = R923,440