Tag Archives: Estate planning

The benefits of creating
a trust

B2Trusts are well-known to facilitate effective estate planning and continuity planning strategies. That said, setting up a trust – whether an inter vivos (between the living) or a testamentary (created in a will) − should be carefully considered and not just implemented blindly.

The difference between testamentary and inter vivos trusts

  1. A testamentary trust is established when a person (the founder) makes provision for establishing a trust in their will. The trust does not come into existence until the founder dies.
  2. An inter vivos trust is set up between the living. In other words, property is transferred before death to the trust by its founder and managed by the trustees for the benefit of another person or persons.

The death benefits of creating an inter vivos trust exceeds the cost – both in time and money. According to The Estate Duty Act, upon death, a duty is levied against your estate known as estate duty. The nett value of any estate will be determined by deducting all liabilities from your assets of your estate, both real and deemed.

Should you create a testamentary trust, upon death the assets are in your name and will need to be transferred to the trust posthumously, meaning all assets are taken into account when assessing the duty payable.

Advantages

Taking the above into account, here are some benefits you could experience from creating a trust:

  1. Reducing estate duty: Inter vivos trusts can be used to minimise estate duty. No estate duty should be payable on assets owned by the trust as a trust does not die.
  2. Protection against creditors: As the trust’s assets are not owned by the beneficiaries, creditors do not have a claim on the assets. This advantage is especially important for people who could be exposed to potential liability. Companies as well as individuals are able to transfer assets into trusts.
  3. Efficient succession: Since trusts never die, beneficiaries will be able to continue enjoying the assets if one beneficiary were to pass away.

Disadvantages

Despite the advantages, there are also some disadvantages of having a trust. They include the following:

  1. Costs: The costs of setting up a trust can be high. If assets are transferred into the trust, then transfer duty needs to also be paid.
  2. Duties of trustees: Trustees could find themselves personally liable for losses suffered by the trust if it can be proven that they did not act with care, diligence and skill according to Section 9 of the Trust Property Control Act.

References:

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

WHAT IS THE COST OF MY ESTATE DUTY?

a1bIn terms of the stipulations of section 4 of the Estate Duty Act No 45 of 1955 certain deductions from the value of an estate are allowed in order to determine the final value of the estate which will be subject to estate duty.

The following two rebates are the most well-known:

  • Section 4(q) – This is the total value of all the benefits bequeathed to the surviving spouse. The value of a usufruct also qualifies as an Article 4(q) rebate; and
  • Section 4A – This is the value of the rebate applied to all estates, which is currently R3.5 million.

Given the value of the section 4A rebate you can rest assured that your estate will not be accountable for estate duty if the net value (assets minus liabilities) is less than R3.5 million. The amount with which your estate exceeds R3.5 million will, however, be taxable for estate duty at 20%.

The Taxation Laws Amendment Act, 2010, amended the section 4A rebate by allowing the part of the R3.5 million rebate not used by the estate of the first deceased spouse to be carried over to the estate of the surviving spouse. This amendment applies to the estates of individuals passing away after 1 January 2010.

The carried over rebate between spouses can be illustrated with the following example:

  • Mr A, who is married to Mrs A, passes away. The net value of his estate is R800 000 after the rebate according to Article 4(q) has been calculated.
  • This amount is bequeathed to his children and therefore not deductible for estate duty.
  • There is no accountability for estate duty as Mr A’s estate only used R800 000 of the section 4A rebate of R3.5 million.
  • At Mrs A’s passing the net value of her estate is R8 million. The following rebate is applicable to her estate: Section 4A rebate to the value of R7 million minus the R800 000 deduction already utilised in the estate of Mr A.
  • Mrs A’s estate will therefore pay estate duty on R1.8 million (R8 million minus R6.2 million).
  • R1.8 million @ 20% = R360 000.

We have to put the utmost stress on the importance of estate planning and a will which gives you the best benefits regarding the composition of your assets and liabilities should the net value of your estate exceed R3.5 million. This does not mean that the use of trusts becomes obsolete in estate planning due to the larger rebate in the surviving spouse’s estate. There are still valid reasons why the bequeathment of a trust by the first deceased is an excellent option, even though it does not initially effect a saving in estate duty. In case of such a trust the assets can be managed by the trustees to the benefit of the surviving spouse and children. A small effort today for much peace of mind tomorrow!

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

SHOULD I PLAN MY ESTATE AS A YOUNG ADULT?

a2_bIt is very important for you to plan your estate, which could include a living Will, a last Will and a living trust. This can help families prepare for difficult times when you are no longer around to assist or advise them. Our lives get busier and more complicated by the day, so estate planning for young and old becomes increasingly important. Young people should consider preparing certain estate planning documents, and in particular financial powers of attorney and living Wills.

At the age of 18 a young man or woman officially becomes an adult in the eyes of the world. This means that you are entitled to make important financial, legal or health decisions about your lives. But what if something happens and you are unable to make these decisions at a critical time? Such situations can range from a small inconvenience to a life-threatening crisis, but if your estate is in order, it can speak on your behalf.

Financial power of attorney

A financial power of attorney allows you to appoint someone you trust, like another family member, to make financial decisions on your behalf. This document can be activated when you are incapacitated or right after it has been signed, and it will remain effective until you can resume charge of your own decisions again.

A financial durable power of attorney will allow the appointed person to handle important legal and financial matters on behalf of the grantor. In the case of a business or financial situation which involves the young adult, such as a passport or car registration renewal, it is convenient for the power of attorney to act on his/her behalf if they cannot tend to the problem. This arrangement may come in handy when there is a legal situation which requires quick action and the young adult is unable to attend. Families with a disabled family member can also benefit from the security of a power of attorney.

Living Will

A living Will enables you to state specific medical wishes if you are alive, but unable to communicate them. Artificial life support in the case of a coma or terminal illness is an issue often discussed in such a document. Preferences regarding administering of pain medication, artificial nutrition and other treatments can be dictated in this document.

The Terry Shaivo case shows what can happen if this document is not in place. The legal battle between her husband, family and state of Florida lasted for years before she was granted her wish and taken off life support.

Health care power of attorney

With this type of power of attorney, you give someone else the power to make health decisions on your behalf. These decisions regarding serious health and emotional crises will be made based on instructions which you have given to your power of attorney beforehand. Sometimes a living Will is combined with a health care power of attorney, because both of these can be revoked, i.e. it can be cancelled at any time by destroying it, communicating your wishes to your doctor, writing a letter regarding the cancellation or by creating a new living Will and health care power of attorney, indicating that the new Will revokes all the previous ones.

Start the conversation

Every family’s legal needs are different, so perhaps you should take the first step in being prepared for the worst. Remember that every time your family composition changes, like when a child is born, you need to adapt your will to include them. Start the process and be prepared.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

SOME POINTERS FOR PLANNING YOUR ESTATE

The main aim of planning your estate is to ensure that as much of the accumulated wealth is utilised for your own benefit and for the maximum utilisation of dependents on your death.

“Estate planning” has been defined as the process of creating and managing a programme that is designed to:

  1. Preserve, increase and protect your assets during your lifetime;
  1. Ensure the most effective and beneficial distribution thereof to succeeding generations.

It is a common misconception that it revolves solely around the making of a Last Will and Testament, or the structuring of affairs so as to reduce estate duty.

Each person’s estate is unique and should be structured according to his/her own unique set of circumstances, goals and objectives.

The lack of liquidity on the date of death may cause for the deceased’s family members and dependents to suffer hardship, as certain assets might be sold by the executor to generate the cash needed.

Liquidity means that there should be enough cash funds to provide for:

  1. Paying estate duty;
  1. Settling estate liabilities and administration costs;
  1. Providing for other taxation liabilities that may arise at death, such as capital gains tax.

Technically the estate is frozen until such time as the Master of the High Court has issued Letters of Executorship.

Dying without executing a valid Last Will and Testament, your estate will be dealt with as an intestate estate, and the laws relating to intestate succession will apply. The Intestate Succession Act determines that the surviving spouse will inherit the greater of R250 000 or a child’s share. A child’s share is determined by dividing the total value of the estate by the number of the children and the surviving spouse. If the spouses were married in community of property, one-half of the estate goes to the surviving spouse as a consequence of the marriage, and the other half devolves according to the rules of intestate succession. If there is no surviving spouse or dependents, the estate is divided between the parents and/or siblings. In the absence of parents or siblings, the estate is divided between the nearest blood relatives.

An executor is entitled to the following remuneration:

  1. Remuneration fixed by the deceased in the Last Will and Testament; or
  1. 3.5% of gross assets plus 6% of income accrued and collected from date of death.

Executor’s remuneration is subject to VAT where the executor is registered as a vendor.

Where the value of the estate exceeds R3.5 million, estate duty will become payable on the balance in excess of R3.5 million, with the exception of the property bequeathed to a surviving spouse, which are exempt from estate duty and/or capital gains tax.

Section 3 of the Subdivision of Agricultural Land Act prevents the subdivision of agricultural land, and such land being registered in undivided shares in more than one person’s name is subject to Ministerial approval.

A minor child is a person under the age of 18 years of age, and any funds bequeathed to a minor child will be held by the Guardian’s Fund, which falls under the administration of the Master of the High Court. These funds are not freely accessible, and are usually invested at below market interest rates. It is thus advisable to provide for minors by means of a trust.

The Close Corporations Act provides that, subject to the association agreement, where an heir is to inherit a member’s interest (in terms of the deceased’s Will), the consent of the remaining members (if any) must be obtained. If no consent is given within 28 days after it was requested by the executor, then the executor is forced to sell the members interest.

Section 3(3)(d) of Estate Duty Act determines that where an asset is transferred to a trust during an estate planner’s lifetime, yet the estate planner, as trustee of the trust retains such power as would allow him to dispose of the trust asset(s) unilaterally for his own or his beneficiaries; benefit during his lifetime, then such asset(s) may be deemed to be property of the estate planner and included in his estate for estate duty purposes.

Where the parties are married in community of property, the surviving spouse will have a claim for 50% of the value of the combined estate, thus reducing the actual value of the estate by 50%. The estate is divided after all the debts have been settled in a deceased estate (not including burial costs and estate duty, as these are the sole obligations of the deceased and not the joint estate). Only half of any assets can be bequeathed.

The proceeds from life insurance policies can be used to:

  1. Generate income to maintain dependents while the estate is dealt with;
  1. Pay estate expenses: funeral, income tax, estate administration, estate duty.

All proceeds of South African “domestic” policies taken out on the estate planner’s life, where there is no beneficiary nominated on the policy, will fall into his estate on his death.

Where a beneficiary is nominated on the policy, the proceeds will be deemed property for estate duty purposes, even and although they are paid directly to the beneficiary (subject to partial exemptions based on policy premiums).

Policies which are exempted from inclusion for estate duty purposes are buy and sell, key man policies, and those policies ceded to a spouse or child in terms of an antenuptial contract.

Certain assets in a deceased estate are excluded from Capital Gains Tax:

  1. Assets for personal use (with certain exceptions);
  2. Assets that accrue to the surviving spouse;
  3. Assets bequeathed to approved public benefit organisations;
  4. The first R2 million in respect of a primary residence;
  5. Up to R1.8 million in respect of small business assets;
  6. Currency, excluding gold and platinum coins.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)