Does a trust eliminate estate duty?

Although death and taxes are certain, people are always looking for ways to minimise taxes upon death. In certain instances, people are not even aware of the tax consequences upon death. They may have to pay in excess of 30% in costs and taxes – capital gains tax, estate duty and executors fees. If no provision was made for these costs and taxes, the executor may have to liquidate assets needed by the remaining family, to make these payments from the estate.

A testamentary trust created upon death

Many people are unaware that all the costs and taxes (as if you bequethed it to any other legatee) will firstly have to be settled from the estate, before the trust is registered, as determined in the deceased’s will. This may leave dependents, such as minor children, with much less assets to survive from. 

A trust created during your lifetime

When you set up a trust during your lifetime, will determine the tax consequences, both during your lifetime, and upon your death. Many people believe that they should only set up a trust after they have created sufficient wealth. This is too late, for 2 reasons. 

Firstly, when you transfer paid up assets held in your personal name to the trust, the trust will not have any liquidity to pay for those assest, and they will either have to be donated to the trust, or acquired on loan account. When you donate assets to the trust, donations tax at 20% on the first R 30 million, and on amounts in excess of R 30 million at 25% will be payable upon transfer to the trust, from liquidity which very few people have. When you sell your assets to the trust on loan account, you will now be required to either charge interest on such loan accounts at at least the official rate (repo rate plus 1%, currently 7.75%), or pay ongoing donations tax if your loan was interest-free or interest is charged below the official rate (section 7C of the Income Tax Act). The donations tax will be calculated on the interest income forfeited by you. This tax on interest forefeited can be equated to the annual payment of estate duty during your lifetime. 

Secondly, the balance of the loan to the trust will be included in your estate upon your death. If you charge interest on the loan, to avoid the donations tax liability, discussed above, all the interest charged will inflate your estate. Section 7C has been successfully implemented by Sars to prevent the estate duty avoidance that could result when a person transfers growth assets to a trust.

The best time, therefore, to create a trust for estate planning purposes, is before major wealth is created during a person’s life. In this instance, the assets will be acquired and grow in the trust, such as shareholding in a company which is acquired at nominal value when it is created, and where all the growth happen in the trust, with no resulting taxes as discussed above.

Managing trust assets, as if they belong to you

If you intended to create a trust, but you have dealt with the trust assets during your life as if they were your own, then Sars can attack the trust and have it labelled as an alter ego trust; in other words, an extension of yourself. Despite the fact that the trust does in fact exist, Sars will disregard the trust and treat the assets as if they belong to you, and include the assets in your estate. There must be a clear separation of control from enjoyment of trust assets. All trustees - and not just one of them - should control the trust assets for the enjoyment of the beneficiaries. 

Trust property included as deemed property in your estate

The Estate Duty Act (Section 3(3)(d)) is relevant where the trust instrument contains a provision that empowers the deceased, immediately prior to his/her death, to:

• appropriate or dispose of property; or
• revoke or vary the provisions of any donation, settlement, trust, or other disposition made by him/her
  
  for his/her own, or his/her estate’s benefit.

In such cases, the trust property will be included in the estate of the deceased as deemed property, so it is important that you are mindful of inserting problematic provisions when you draft your trust deed. If you have a trust, please review and amend your trust deed and remove any provisions which may impact your estate negatively, especially if you have not made provision for additional estate duty and capital gains tax payable upon your death, as a result. 

When and how you set up a trust, and how you execute it, may impact estate duty payable.