Trusts and Estate Planning Archives

I’ve had a few horror stories lately about people who died intestate. One was a client for whom we prepared a Will, but she never signed it. She died at a young age and her family got nothing of her estate because her future husband had paid lobola and they were therefore deemed to be married. Fortunately, most of her wealth was held by a trust that we had set up for her and her family were beneficiaries of the trust. Another was a professional lady who lived with a very close…

Did anyone ever tell you that income splitting was a great idea? Read this before you believe them! There’s one bunch of attorneys who specialise in trusts that punt income splitting through a trust conduit as a great way to minimise tax, but they didn’t think it through properly. Here’s how it works – The trust earns taxable income on which it would be taxed at 45%, but no problem, flow the income through the trust using the conduit principle, and pay it to beneficiaries who are on a low tax rate. Magic! The beneficiaries will pay maybe 18%…

What happens to the trust income when you retire? Now it’s you that needs the money. In our ideal trust structure, the trust owns the investment company, which pays 28% tax, then re-invests the 72% to build the investment portfolio. Maybe the company must declare dividends to its shareholder, the trust, and these can then flow to you as a beneficiary, like this – Let’s add up the taxes on say, R100 000 taxable income. Take off 28% Income Tax paid by the company and that leaves R72 000 available for dividends which will be taxed at 20% or R14 400.

Trade inherently holds relatively high risk compared to asset holding, so they should be in separate trust-owned companies. But how do you get the money from one to the other? Many would advise you to have them both owned by a holding company (see the article image taken from such an advisor’s website). The trading company declares its profits out via regular dividends to the holding company, which in turn lends them to the investment company. There’s no Dividends Withholding Tax when the shareholder is another company and the dividends keep the value of the trading company near nil,…

Your trust should own all of your investment properties for two reasons – To protect them from your creditors, and more importantly in most cases, to protect them from the nightmare taxes that kick in on death. So, how should the trust hold that property portfolio? Like this? You see the problem? It’s that 45% tax that only leaves 55% to be re-invested back into the portfolio. Surely there’s a better way? The solution is simple. We interpose a company between the trust and the properties – With this set-up, the company earns the income, pays 28% tax…

Transfer Duty is a relatively simple tax, but it is treated in some very strange ways in the legislation. Here are some examples – As far as I have been able to determine, it is the only tax that is applicable on a transaction between spouses. All others – CGT, Donations Tax, Estate Duty do not kick in at the time of the transaction. If the shares of a company are sold and whose assets are mostly residential property, then this transaction is treated as the sale of the properties and Transfer Duty applies. However, if the properties are mainly…

Every time we prepare a trust deed, we write a will for the client and their spouse, but who should hold the originals? When you sign your Will, try (I know it’s tough) to imagine the events immediately following your death. Grief (you hope), funeral arrangements, financial affairs to sort out, inventory of your estate to be taken ………… Now where the heck is that Will? It happens all too often. Make sure that your spouse and children know (1) who your executor is and (2) where you keep your Will. Ensure that there are two originally signed copies. One…

I had an interesting meeting recently, the results of which ran contrary to my normal views. But there were good reasons. These clients wanted to set up a property investment trust to produce income for their mother who has the money available to invest. They propose to shut the trust down and distribute the properties to the remaining beneficiaries (themselves) when she dies. Normally, my proposal would include the following – 1) The client would be the founder of the trust 2) There would be a…

Last week, I wrote how a trust saves tax for property investors. The same applies to entrepreneurs. You’re building your business, and you hope that some day it will provide for your retirement or that you will be able to sell it and invest the money for retirement income. And instead, you die. Damn! You may recall that the two taxes on death are – Capital Gains Tax (CGT) at about 18% Estate Duty at 20% Capital Gains Tax (CGT) You are deemed to have sold your assets to your deceased estate at the moment of…

The other day, a client sent me his draft will to review. Amongst other things, he had bequeathed his dog to his sister-in-law. This raised a two interesting issues. The first question was why would he want to do that? Those of you who love your pets as children may want to ensure that a close family member agrees to care for them in the event of your death. It may then be appropriate (though not necessary) to include the bequest in your will. Then we must ask whether this can be done, and the answer is simply yes, even…

If you own investment property in your own name, SARS will grab about 30% of it’s value in taxes when you die. You built an investment property portfolio. It cost you R10m and, by the time you die, it is worth R40m. Here’s what happens. You are deemed to have sold the properties to your deceased estate at the moment of death for their market value of R40m. That means a capital gain of R40m…

Only beneficiaries can receive benefits from a trust, so it is important to know who can and cannot be beneficiaries. Beneficiaries can be defined by name. For example, “David Marks, Peter Jones, Sally Abrahams” etc. Or as an identifiable class of people. For example, “Any child born of or adopted by David Marks”. Another Trust can also be a beneficiary and again this could be defined by Trust name and number or by identifiable class such as “Any trust of which David Marks is a beneficiary”. A Company or CC can be a beneficiary. This could be defined by name…

In theory, yes you could, but in practice that would be a very silly thing to do. Perhaps the best way to illustrate this is that about 15, maybe 20 years ago, I studied trusts very carefully and wrote a trust deed template for use with all future clients. That template has served me well, but because trust case law keeps changing, the requirements of the Master of the High Court keep changing and because I keep thinking of subtle but important little tweaks, I am constantly changing the template. Now if I, recognised as one of the country’s…

We always recommended an independent professional trustee. Now it is a “must have” The reason for the recommendation dates back about 12 years to the Badenhorst vs. Badenhorst case. The Badenhorsts were getting divorced and Mrs wanted 1/2 of Mr’s assets. He didn’t have any – they were all owned by a living trust that he had set up previously. Mrs Badenhorst took him to court and won the case. The judge said that Mr Badenhorst’s trust only had his brother as the other trustee, they never discussed the trust (i.e. there were no minuted meetings), Mr B bought and…

In a word, No! So what do we mean by the Asset Protection function of trusts? One important function of a living trust is to protect assets from your creditors if you should be bankrupt, or even if you should be attacked by your creditors. There are three important things to remember – 1) The trustees must never sign surety for any of your personal debts, because the firewall would break down for that creditor. 2) If the creditor is on the trust’s side of the firewall (such as when the trust takes out a bond), then the related assets…

There are a few simple mistakes that people make when writing their wills. Here they are – 1) Don’t write a joint will with your spouse. Rather two separate wills. 2) Leave everything to your spouse so that your R3,5m Estate Duty allowance passes to him/her. 3) Then, if you die simultaneously, leave everything to your living trust, so that your trustees can look after the beneficiaries in accordance with their needs from time to time. 4) Never bequeath money to a minor, because the money will have to be deposited in the Guardian’s Fund. Rather…

I often get asked “If assets are owned by my company, are they protected from my creditors?”. The answer is usually no. Why? If you own the shares in the company, then the shares are assets in your name which can be attacked by your creditors. If they get your shares, they get the assets. So no protection there. If, on the other hand, you own shares in two companies, the creditors of the one company cannot attack the assets of the other company simply because you’re the shareholder of both. The “Limited” in (Pty) Ltd means that the shareholder’s…

I write a free will for anyone who buys a trust from us and one for their spouse as well, but I never write a joint will for both of them. Why? Jane and Trevor had a joint will leaving everything to each other when the first died and then the entire estate to their two children in equal portions when the second died. After Jane died, one of their children had a serious road accident and was restricted to a wheelchair. The other was making a stash as a businesswoman. Trevor died and the estate…

I was recently asked this rather interesting question and my response was “Yes, most definitely”. Why? My reply stands on two pillars – Firstly, the capital which would be an asset of some kind, such as fixed property or shares in a company, has not been distributed, it is either still held by the trust or has been disposed of by the trust. Either way, that’s a separate transaction from the Capital Gain. The separation of the capital gain has not changed the asset. It is still a piece of fixed property or it is still the same shares. Secondly,…

Trusts and Estate Planning

Trusts and intestate succession

The conduit principle and income splitting

How to draw income from your trust when you retire

How trading and asset holding companies should be connected within a trust

How your trust should hold investment property

Seven strange things you need to know about Transfer Duty

Who should keep your will?

When should you use the conduit principal to draw funds from your trust?

How trusts avoid taxes for entrepreneurs

Can I bequeath my pets in my will?

How trusts avoid taxes for property investors

Who can be a beneficiary of a trust

Can I form my family trust myself?

Does my trust need an independent professional trustee?

Can a trust prevent bankruptcy?

10 things to remember in your will

Can a company protect my assets?

Why a joint will is a bad idea

Can a capital gain be distributed to income beneficiaries of a trust?