Overview of Estate and Trust Planning

Part of our offering is to ensure that your Last Will and Testament is drawn up correctly and that all aspects of your affairs have been taken into consideration.

Last Will and Testament

Part of our offering is to ensure that your Last Will and Testament is drawn up correctly and that all aspects of your affairs have been taken into consideration. We not only deal with the estate duty implications, but ensure that your objectives for your family are achievable and the implications of these decisions.

Estates and Capital Gains Tax

In terms of current legislation there are certain deductions and rates that apply to estates and estate planning as follows;

• Section 4A primary abatement – R3.5 million estate duty free
• Estate Duty payable at present : 20% on any value over and above R3.5 million
• Section 4(q) abatement – bequests between spouses are estate duty free

If assets are bequeathed to a surviving spouse the estate of the first dying if free of estate duty, but the liability merely passes on to the surviving spouse and their estate will be dutiable on their death.

If the estate is distributed to anyone other than the spouse, the estate will become dutiable. There are ways in which these issues can be dealt with in order to reduce the overall estate duty liability and these options need to be discussed with you in more detail.

Capital gains tax was introduced on 1 October 2001 and applies to all individuals, companies and trusts. The death of a person is a CGT event that will give rise to a CGT liability payable in the estate. However, any asset bequeathed to a spouse is free from CGT. A spouse acquires the
assets from the estate at the base cost at which the deceased acquired them. Needless to say CGT will be payable when the surviving spouse disposes of the assets or on her death.

Set Up of a Trust

The trust deed is the document which clearly sets out the Donor of the trust, nominated trustees and beneficiaries, and the powers of the trustees are clearly defined in the document. The trust should be a discretionary trust which provides the trustees with discretionary powers in administering the trust. Although we do recommend that a Letter of Wishes is prepared setting out your intentions regarding the more personal aspects that the trustees should take into consideration.

The deed is registered with the Master of the Supreme Court and Letters of Administration are issued. The cost of registration is R104.50.

Once the above steps have been taken, the trustees agree to take over certain assets held in your personal name on an interest free loan basis at current market value. A loan account is created in your name as the trust does not have the funds at present to pay for the assets.

Depending on the assets to be taken over, transfer costs can vary;

Equity .25% of market value
Cash No cost
Property 8% transfer costs

The loan account that is created in your name is reflected in your estate as an asset and any growth that takes place on the assets in the trust, forms part of the trust assets. The reduction of the loan account over a period of time can be achieved in many ways, which ultimately reduces both executor’s fees and estate duty in your estate. It should be noted that the loan account will not increase unless additional assets are transferred to the trust.



Loan Account Reduction

The way in which the trust is administered, and the accounting procedures that are implemented, will assist in the reduction of the loan account during your lifetime, the intention is to reduce the loan account as efficiently as possible during your lifetime so that the value is considerably reduced with the result that your pay less in both executor’s fees and estate duty.

For example, in terms of present legislation, a taxpayer is allowed to make an annual donation of R100 000.00 without attracting donations tax. The loan account can be reduced by this annual donation and by any other withdrawals that are made from the trust on an annual basis.

It should be noted that the loan account is created when the transfer of assets takes place. You cannot transfer assets to a trust without a loan account being created unless you donate the assets to the trust and pay donations tax of 20%. If donations tax is paid there is no loan account and therefore no asset in your estate.

This needs to be discussed in more detail once a decision has been made as to what you ultimately want to achieve and whether this is a viable option.

Income Tax Implications – Section 7 and Paragraph 73

Paragraph 73 of the income tax act is a significant new introduction to our tax law. In the past, the Receiver of Revenue applied Section 7 liberally; i.e. if a donor made an interest-free loan to a trust he would be liable for tax on all income retained in the trust or awarded to a minor child of the donor.

In terms of the new provisions, the donor is liable for capital gains as well as tax. Paragraph 73 however states that the income and capital gains that can be taxed in the hands of the donor are limited to the amount of the interest foregone.


For example:

If I lend R 1 million to a trust interest free and I could have earned 10%, I am deemed to have made a donation of R100 000.00 to the trust,

If the trust had taxable income of R50 000.00 and a capital gain of R150 000.00, the donor would be liable for tax on R100 000.00 and the trust would be liable for tax on the balance.

Income Tax

In terms of present legislation, any income that is earned by investments held within the trust is taxed in the hands of the donor, i.e. the person who transfers the assets into the trust, as a loan account is created in their name and the income is therefore applied to them.

However, the income of the trust can be split between major tax payers which can assist in the reduction of taxable income in the hands of any one beneficiary. This is an accounting structure that needs to be done correctly. It is always advisable to have interest income taxable in the hands of a beneficiary with the lower tax bracket.

It should be noted that fees paid for the administration of the trust can be deducted from the taxable interest income and the net amount subjected to tax.

We also undertaken to ensure that the income you receive from the close corporation is correctly transferred to the family trust and assist in not only reducing income tax, but ensuring that any estate duty liability is reduced as well.

Letter of Wishes

Because the trustees have been given discretionary powers, you should prepare a Letter of Wishes clearly setting out your philosophies and intentions regarding the administration of the trust both during your lifetime and after your death. You should ensure that the letter of wishes is flexible enough to allow for changes in legislation and the changing circumstances of beneficiaries.

Trusts and Capital Gains Tax

Any gain that arises in the trust will be subject to CGT in the hands of any resident beneficiary where the trustees have exercised their discretion in favour of that beneficiary and CGT will be paid at individual rates.

Paragraph 80 of the Income Tax Act allows a trustee to vest a capital gain in a beneficiary. It goes further and allows the trustee to vest the actual gain (as opposed to the assets) in a beneficiary without physically paying the gain to the beneficiary. The gain is then added to the income of the beneficiary and taxed in his hands at his marginal rate of tax. It is important to note that there must be an actual vesting, i.e. the gain now forms part of the estate of that beneficiary.

Depending on investment mandate and asset structure any CGT event can be delayed by selecting investments that create the opportunity to delay CGT for as long as possible.

In order to make investments as tax efficient as possible it will be necessary to reduce as
much as possible exposure to income generating investments. If your wife is a registered tax payer, interest income can be allocated to her, and if she has a lower tax rate than you, the payment of tax is reduced substantially.

Trust Administration

Our business is built on the relationships that we have with our clients, and we provide a holistic approach to their affairs and not only do we put structures in place but we manage these structures on their behalf.

Should you decide to set up a family trust, we undertake the administration of the trust on your behalf and provide the following services;

1. Day to day administration of the trust
2. Preparation of documents for financial statements for the trust
3. Deal with all tax affairs of the trust
4. Provide ongoing advice regarding changes in legislation
5. Keep your family up to date on legislation that affects them
6. Manage the investments of the portfolio
7. Arrange quarterly meetings to discuss the trust and investments
8. Hold annual reviews to update mandates and strategies
9. Make payments to beneficiaries as and when required

In other words we manage the day to day affairs of our clients so they can concentrate on what they do on a daily basis and they are comfortable that their affairs are being attended to professionally.

An annual fee for this service is discussed and agreed on with the client and is then amended on an annual basis where necessary.

Our basis costs for the administration of a trust is calculated in two ways:

Professional / Administrative Trustee

We can either be appointed an administrative or professional trustee by the trustees. The difference being:

Professional Trustee : We assist the trustees in understanding and applying their knowledge in the management of a trust. There are fiduciary responsibilities that must be adhered to in terms of the Trust Property Control Act as the undertaking of this appointment has to be taken seriously.

A fixed annual fee can be arranged for the involvement we have with the trustees on an ongoing basis.

Administrative Trustees – negotiated fixed annual fee : We undertake to administer the trust and prepare the necessary documentation required for proper administration. This consists of resolutions and minutes of the meetings of trustees, as well as the administrative functions as set out above.

For this fee we also undertake to manage the investments of the trust on an ongoing basis. Should the trustees require us to accept the appointment as administrative trustee and there is no management of underlying investments a fixed fee is negotiated.

We are hands on with advice and administration of a day to day basis and assist the trustees and beneficiaries in all aspects of correct trust management, estate planning, and tax and investment structures.

Once the trust is up and running and investment planning becomes part of the structure, we undertake to oversee the investment portfolio to ensure that investment mandates are being met.

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