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Trusts and Estate Planning

I meet so many people who have a family trust (often three depending on who they bought from) gathering dust in a file somewhere. Often the trusts were bought after attending a seminar on the subject, but because there was no follow through they never got to put the trust(s) to the use for which it was intended.

So let’s explore one good reason for forming a trust during your lifetime (it’s called an inter vivos trust meaning “during life”).

When you die, you’ll probably leave everything to your spouse and there will be no estate duty and no capital gains tax. The problem arises when your spouse dies. We’ll call her “she” because men generally don’t live as long as women, but it works either way. On her death, she will be deemed to have sold all of her assets to her estate at the moment of death at market value and if that means she made a capital gain on some of them, then CGT will be levied at up to 13 1/3%. In addition a 20% Estate Duty will be levied on her net assets at the time of death. There are some allowances, but let’s assume that they get used up on non-investment assets like your home and your holiday home.

In simple terms, if you bought a house for rental that cost you R500 000 and it is worth R2 500 000 when she dies, then her estate will pay about R750 000 in taxes on that one asset! And, of course, she didn’t actually sell the house, so there’s no cash to pay the taxes.

You can avoid this problem by forming a trust and having the trust own the investment property instead of you.

When you and your spouse die, your trust does not die, so your death is not a tax event for the trust.

Got it? A trust does not pay Estate Duty because it is not a person and it will only pay CGT when it sells the property (or distributes it to a beneficiary, which it is not likely to do).

So now go and form a trust (or come to us and we’ll do it for you). What next? Sometimes it is OK to sell your investments to the trust, but that could mean that you have to pay some taxes (CGT and transfer duty). If the taxes are low, then we would probably do it right away. If not, we would wait until the next investment came along and buy that in the trust rather than in your own name. Or maybe you would sell an investment, lend the money to the trust and let the trust buy another investment with the borrowed money.

It does need a bit of management doesn’t it? But it is well worth it.

Should you wish to make an appointment, please feel free to visit Derek’s diary and book a time that suits you.



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Looking for even more informative content? Check out the books I have written which have proved to be very popular.

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