Brian Eaton, the managing partner at RSM Betty & Dickson, a firm of chartered accountants, discussed the importance of estate planning at a meeting of the ipac/ Personal Finance Investors' Club in Johannesburg recently.
A trust is an effective vehicle to minimise the amount of estate duty that you have to pay at death, Brian Eaton says.
However, estate planning is not only about saving estate duty. It concerns the management of your assets during your lifetime and ensuring that, on your death, your assets are distributed to the maximum benefit of your family and other beneficiaries.
But, in planning your estate and setting up trusts - which cost money to establish and administer - you should take care that you don't impoverish yourself during your lifetime simply for the sake of saving on the payment of estate duty at your death, he says.
Estate planning is complex and there are numerous factors that must be taken into consideration. Therefore, it is best to seek professional advice and assistance when using trusts to plan your estate.
Types of trusts
There are two basic types of trusts:
- An inter vivos trust, which is set up during your lifetime. An inter vivos trust is generally used to reduce your estate duty liability. This is done by "freezing" the value of an asset at the time it is transferred into the trust. In this way the growth in value of an asset takes place within the trust, and not in your estate.
- A testamentary (or will) trust, which is established in terms of your will and only comes into existence after you die. A testamentary trust is mainly used to protect the interests of beneficiaries in a variety of situations. For instance:
* If your beneficiaries do not have the skills to manage the assets themselves.
* When it is better for an asset, such as agricultural land or shares in a company, to be owned by a single owner.
For example, if you own a controlling stake in a company, that control will be lost if the shares are divided between your beneficiaries. By placing the asset in a trust, you can hold the asset intact while the heirs become beneficiaries of the income generated by the asset.
* To protect your assets from creditors. The assets you place in a trust do not form part of your personal estate and, in most instances, cannot be claimed by your creditors.
* To protect and manage the assets of minor children or of mentally and/ or physically disabled adult beneficiaries who are unable to support themselves.
Trusts and estate planning
By transferring your assets into a inter vivos trust, you are able to peg the growth of those assets in your personal estate at the value at which the assets are transferred to the trust.
When you die, your estate becomes liable for estate duty at a rate of 20 percent of the net value of the estate over R1.5 million.
For the purposes of calculating estate duty, your estate includes not only your assets, but also what are called deemed assets, such as the proceeds of life assurance policies, which you leave to your beneficiaries.
To use a trust for estate planning purposes, you have to transfer your assets to an inter vivos trust. It is important that you hand over control of those assets to the trustees, who manage the assets for the beneficiaries of the trust. If you do not, the taxman may consider the assets as deemed property in your estate, even though they are held by the trust.
The initial trustees of a trust are named in the trust deed or, in the case of a testamentary trust, in your will. However, the trustees must be appointed by the Master of the High Court (who grants them a letter of authority) before they are allowed to manage the assets.
You can transfer assets to a trust in the following ways:
- By donating the assets to the trust. However, this is not cost-effective, because you have to pay donations tax on any amount over R30 000 that you donate in a year. And, you have to pay donations tax in the year that you make the donation, whereas estate duty is only payable at death. Eaton says for a trust to be cost-effective, you should generally use it to hold assets of R2 million or more.
- By selling your assets to the trust. In order to do this, a loan account is created in favour of the donor because the trust does not have money to pay the donor. The value of the loan account is regarded as an asset in the estate of the donor.
Don't forget to make the most of the R1.5 million estate duty abatement when planning your estate. You can use the abatement by leaving up to R1.5 million to a testamentary trust or an existing inter vivos trust - especially assets that are expected to grow in value - and transferring any remaining assets to your spouse. No estate duty is payable on assets left to a spouse.
Eaton says establishing and operating a trust will cost you money. There are also costs attached to transferring assets to a trust. These costs include: capital gains tax on the disposal of assets, uncertified securities tax on shares, VAT if the asset being transferred is trading stock in the donor's hands; and transfer duty if the trust is buying property.
Tips
- If you already have a trust, don't establish another for estate planning purposes; you will merely be duplicating costs.
- There are legal formalities associated with setting up trusts, so get proper advice.