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What Are The Benefits Of Leaving Assets To A Trust Fund?

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When a person passes away, all their assets are placed into an estate administered by an Executor. These assets can include both moveable and immoveable property. Immoveable property relates to assets such as residential and commercial property. Moveable assets can be money in the bank, cars, furniture, jewellery, etc. The Executor will finalise all the administration needed to process the estate, pay the relevant taxes and Estate Duty and distribute the remaining assets to the beneficiaries.

What Is Estate Duty?

Estate Duty is a tax levied on the assets of a South African resident or on South African assets of a non-resident if the estate is valued above R3,500,00. Section 4 of the Estate Duty Act, 1995 specifies the various deductions that are allowed to determine the net value of the estate.

What Deductions Are Allowed Under The Estate Duty Act?

A tax exemption of R3.5 million is allowed on the entire estate before Estate Duties are calculated. Estate Duty is then payable on the remaining value of the estate at a rate of 20% on the first R30 million and 25% on the balance of the value over R30 million. If the estate’s value is under R3.5 million, SARS must still be notified of the deceased’s death.

What Happens to Assets Accrued After A Person’s Death?

Any income accrued up until the date of a person’s death is taxable. After their death, the Deceased Estate is formed. Any assets are held here until the liquidation and distribution have been finalised as per Section 35(12) of the Administration of Estates Act. Income that accrues after the date of death but before any assets being distributed to the beneficiaries is dealt with slightly differently under Section 25 of the Income Tax Act.

When Must Estate Duty Be Paid?

Estate Duty must be paid within 12 months of the date of death or 30 days from the assessment date – if the assessment has been issued within 12 months of the date of death. Late payments currently attract an interest of 6% per annum.

Who Is Liable To Pay Estate Duty?

As the estate administrator, the Executor is usually liable to pay the relevant Estate Duties. However, in some cases, estate duties may be payable by the beneficiary. This is particularly relevant when a policy is paid out to a beneficiary.

Who Can Establish A Trust Fund?

All South African citizens over the age of 18 may establish a trust. However, they need to be fully aware of its impacts and potential challenges. Many people feel that trusts are only for the wealthy, but there are still a number of benefits from property owners placing their immovable assets into a trust for their family:

  • As part of a trust, the property is not subject to inheritance tax as it no longer makes up part of the deceased’s estate.
  • A trust does not require an Executor, who may charge up to 3.5% of the estate’s value for their services.
  • A trust will provide for remaining dependants and minors.
  • The trustees administer the trust’s assets until the minor dependants come of age, or according to the trust deed’s specifications on the termination of the trust.

However, trusts are not without complications, and serious consideration of high tax rates, trustees and several other issues will have to be considered and thoroughly discussed with an attorney before setting up one. When a property is transferred into a trust, it is important to be aware of the fact that this property is now out of the owner’s control. Here are some thoughts to consider:

  • Many issues surrounding the setting up of a trust occur when the relationship between the founder of the trust and the trustee/s disintegrates. This can happen in the case of a relationship breakdown, so it is crucial to choose the trustee/s very carefully.
  • There are costs involved when initially setting up a trust.
  • If the beneficiaries need to use the trust to secure finance, it is worth noting that banks rate trusts as a higher risk than an individual.
  • Any future changes to legislation involving trusts are always possible and may limit the benefits they currently provide.
  • Any rebate an individual may have falls away when the asset is in the trust. For example, capital gains rebate on a primary residence.

Through AED Attorneys, proper estate planning helps to legally ensure that assets provide for family and loved ones, rather than the taxman. Here are some recommendations from AED Attorneys, but are by no means exhaustive:

  1. Set up an Inter Vivos Trust

This is a living trust, created whilst an individual is still alive. It allows the trust owner to access their assets, which may be property, investments or cash while they are still alive. On their passing, the designated beneficiaries of the trust are granted access to the remaining assets and the trust is managed by a successor trustee.

  • Invest in a Retirement Annuity (RA)

RA’s are attractive from both an investment and estate planning perspective. The contributions are tax-deductible; they enjoy a tax-free grow on their value and are excluded from the deceased’s estate.

  • Buy Life Insurance

Life insurance can effectively fund any taxes due on the estate after death.

  • Leave R3.5m To The Trust

As mentioned earlier, estates worth less than R3.5m will not attract estate duty. Also, any amounts left to a spouse are free of estate duty and capital gains tax until the spouse sells the asset. Therefore, leaving R3.5m to the trust allows children to benefit from the estate duty exemption of both parents. Recent changes to the law have reduced this need, but leaving money to a trust should still be considered for growth assets.

While it is worth being informed about estate planning, it can get quite complicated. AED Attorneys helps clients set up Wills and Trusts to make provision for dependants and minimise estate duties legally.

AED Attorneys understands that every situation is unique. Although they strive to ensure that the information contained herein is accurate at the time of publishing, it cannot be guaranteed to be without errors or omissions. As a result, AED Attorneys, its employees, independent contractors, associates or third parties will under no circumstances accept liability or be held liable, for any innocent or negligent actions or omissions in this article, which may result in any harm or liability flowing from the use of or the inability to use the information provided.