ESTATE PLANNING – Do Trusts Still Have a Part to Play?
by Herman Van der Merwe (HVM Consulting)
In days gone by, trusts played a significant role in estate planning. Changes to tax legislation over recent years and a change in attitude by SARS to trust structures have caused many to question whether the use of a trust for estate planning purposes is still appropriate. This writer still firmly believes that, despite the above, a trust can still help to:
- dramatically reduce Estate Duty payable
- postpone payments of capital gains tax due
- assist the liquidity of the deceased estate
- provide ongoing use of assets which are not frozen in the deceased estate
It is relevant to first examine the events of recent years which have led some to question the usefulness of Trusts. Briefly, they are:
- the increase in tax rates applicable to Trusts.
- pronouncements by SARS and other public figures stating their intention to examine various family trust structures
- changes to the Estate Duty Act
The changes to the Estate Duty Act warrant further exploration. Previously, all persons received an abatement of R3.5 million on the value of their estate. The balance of the Estate attracted Estate Duty at 20%, unless such balance was bequeathed to the surviving spouse. Traditional practice was to bequeath R 3.5 million to a trust and the balance to the surviving spouse. In this way both spouses would receive a R3.5 million abatement. The new legislation allows the surviving spouse to claim an abatement of R7 million, reduced by any abatement claimed by a pre-deceased spouse. The effect of this change is that it is no longer necessary to create an artificial trust structure simply to ensure the full R7 million abatement is received by husband and wife.
So then one might ask, why use a trust at all? The answer is because the use of an inter-vivos trust (a trust established in the lifetime of an individual) can lead to significant savings and benefits, notwithstanding the negatives discussed above. The benefits are:
- Significant savings in Estate Duty. Assets can be sold to a trust on loan account at current market values. Any subsequent growth in the asset accrues to the trust, not the individual. On the death of the individual, only the amount still owing on loan account is included in the Estate. In the case of high growth assets (property, investment portfolios, etc) the saving on Estate Duty could be massive. Take the example of Mr A, who purchases an investment portfolio for R1 million in his trust. He finances the acquisition himself i.e. the trust owes him R1 million. Twenty years later, when Mr A dies, this portfolio is worth R10 million. If this asset was owned by himself, the asset would attract Estate Duty of R2 million (assuming the abatement of R3.5 million has been used on other estate assets). However, due to the use of the trust, the only asset in his Estate is his loan account, on which only R200 000 Estate Duty is payable.
- Your trust can also assist in the postponement of payment of capital gains tax. This is because a person in deemed to have disposed of his/her assets, at market value, the day before death. The estate is then taxed on the difference between this market value and original cost at the relevant CGT rate. Take the example of Mr A in the previous bullet. In addition to additional Estate Duty that would have been payable if he still owned the asset, he would also have had to pay capital gains tax on the R9 million profit. Assuming a CGT rate of 10%, this is another R900 000 in tax payable to the Estate.
- A trust protects the liquidity of an estate. If Mr A had had to pay the higher Estate Duty and CGT amounts, his executor may have been forced to liquidate an asset at an inopportune time in order to pay these increased taxes.
- Assets in a deceased estate are frozen in the executor’s hands for a substantial period of time. Because Mr A had his assets in a trust, the trustees will be able to continue to administer those assets and, if necessary, utilise the income there from for the benefit of the deceased’s family. If the assets are trapped in the deceased estate, the family may not be able to access the assets or income they generate until the estate is wound up.
- A trust protects assets from attack by creditors against the individual.
- The trust can distribute it’s income to beneficiaries at favourable tax rates in certain circumstances.
It is clear from the above that trusts still have a very important role to play in estate planning. The trick is to plan from an early stage in order to maximize estate planning benefits.
HVM Consulting is a young dynamic financial accounting and training company based in TechnoPark, Stellenbosch.