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Trusts can have an important role to play in estate planning and will affect your decision on how much risk and investment life assurance you require, Harry Joffe, the Chief Legal Advisor of Discovery Life says.
The Star, November 22, 2003
A TRUST IS A KEY TOOL IN PLANNING YOUR ESTATE
By: Bruce Cameron
Trusts can have an important role to play in estate planning and will affect your decision on how much risk and investment life assurance you require, Harry Joffe, the Chief Legal Advisor of Discovery Life says.
This is because setting up a trust will affect how much estate duty and capital gains tax (CGT) your estate will pay and the provision you make for your dependants after your death.
When you die, your net assets (your assets less your liabilities) are subject to estate duty of 20 percent, after an initial exemption of R1.5 million.
In addition, Joffe says, because death is regarded as a CGT “event”, gross assets are subject to tax at the marginal tax rate you were paying in the year of your death, after an initial R50 000.00 exemption.
Assets left to a spouse or partner are exempt from both estate duty and CGT.Estate duty becomes payable when the surviving spouse or partner bequeaths the estate to other beneficiaries. Your partner can be someone of the same or the opposite gender with whom you have a long-term relationship. The law does not define what constitutes a long-term relationship, and the surviving partner would have to show that the relationship was permanent.
Joffe says another tool you can use in estate planning is donations. This is because donations between spouses and partners are not subject to donations tax. And you can donate up to R30 000 a year without paying donations tax. Any amount in excess of R30 000 is taxed at 20 percent. In effect, the exemption allows a couple to donate R60 000 a year to a trust or to other beneficiaries. However, you cannot accumulate the exemption. If the exemption is not used in one tax year, it cannot be carried through to the next tax year.
Joffe says a trust is a key tool in estate planning for wealthier individuals. A trust is effectively an entity which separates control over an asset (by you and other trustees) from the enjoyment of the benefits of that asset (by you and others).
You need, however, to transfer the assets to the trust without paying donations tax. One way to achieve this is for you, the donor, to provide a loan to the trust. Only the loan account remains in your estate.
The three main uses of a trust are:
As the donor, you cannot be the sole trustee or control the trust. If you are the sole trustee, you could fall foul of the Estate Duty Act, in terms of which you would be seen as controlling the trust for your own benefit. In this case, the assets in trust would be added to your estate.
ADVANTAGES OF A TRUST
Joffe says there are a number of advantages to placing assets in a trust for estate planning purposes. These advantages include:
Loan accounts can be reduced by loan repayments using the annual R30 000 donations tax exemption. And remember that both a husband and wife can make donations, increasing the amount to R60 000 a year. No interest needs to be charged on a loan to or from a trust.
When the loan to the trust has been paid or written off, donations can still be made to a trust, which then invests the money in a growth investment, such as a life assurance endowment (investment) policy. When the investment matures, the trust can lend the money back to you, the donor. You can use the money for things such as school fees, so no new assets are added to your estate.
When you die, your estate will have to pay back the money to the trust. This liability reduces the size of your estate and the estate duty payable.
SARS can stop any abnormal transactions entered into purely to avoid tax. If the beneficiaries of a trust are minors and assets are transferred to the trust on a loan account you, as the donor, are taxed on any income or capital gains made on the assets transferred to the trust.
Joffe says trusts can be used for good and bad. An example of a bad use of a trust would be to transfer all your assets into a trust to avoid paying out a spouse on divorce.
But equally, he says, a trust can be used for the good of a divorced spouse. Many maintenance obligations continue after death, until the ex-spouse dies or remarries. On the death of the spouse who has the maintenance obligation, his or her former spouse will lodge a claim against the estate for the maintenance obligation, and this can delay winding up the estate and result in possible conflict with the beneficiaries. The solution is to create a trust on the death of the spouse who has the maintenance obligation, so that the trust takes over the maintenance obligation and carries on paying income to the ex-spouse.
When the maintenance obligation expires, the balance of the capital in the trust can be distributed to the deceased’s heirs.
TAX CONSEQUENCES OF A TRUST
Joffe warns that there are tax consequences to placing assets in a trust. These include:
However, Joffe says the tax paid by trust can be reduced by:
COSTS OF A TRUST
Joffe says there are a number of costs associated with trusts, including: