The document discusses the legal nature and benefits of trusts. It states that a trust is not a legal entity but that trustees are considered separate legal entities. It lists benefits of trusts such as reducing estate duties and protecting assets from creditors. It also discusses disadvantages like loss of control over assets. The document then covers topics like the differences between inter vivos and testamentary trusts, the role of independent trustees, trustees' duties, and common problematic clauses in trust deeds. It provides tax implications of trusts and strategies for transferring assets to trusts.

1. Welcome

2. .
ESTATE PLANNING
A LEGACY OR A LIABILITY?

3. TRUSTS

4. Legal nature of a trust
• A Trust is NOT like a company or cc.
• A Trust does not posses a legal personality.
• A trustee, in his legal capacity, is regarded as a
separate entity.
• Section 1 of the Income Tax Act defines a trust as
a “person”.
• Trust has the structure of a stipulatio Alterii.
• Inter vivos trust is an agreement and all the rules
of the law of contract apply.

5. Benefits of a Trust
• Ensures the smooth handover of assets from
one generation to the next.
• Cares for assets for those who are unable to
look after the assets themselves.
• Preservation of wealth
– Example: a farm or holiday house passed
from one generation to the next – EDT
and CGT.

6. Benefits of a Trust
• Reduction of death duties which are made
up of :-
– Deemed CGT
– Exec fees
– Estate duty tax
• Protection of assets from creditors.

7. Benefits of a trust
• Income tax, Capital gains tax and donations
tax:
– Donations tax.
• If a natural person makes a donation
greater than R100k then donations tax.
• From a trust then no donations tax.
– Income Tax and capital gains tax in the
trust – discuss at a later stage.

8. Disadvantages of a trust
• In order for a valid trust to come into existence the
donor must hand over ownership and control to
the trustees.
• The trustees become owners of the asset.
• Decision making is now made in terms of the deed
and not by 1 trustee ie the original donor.
• Costs: Banks normally charge between 1 – 2% of
capital.

9. Inter Vivos v Testamentary
• Pro-active planning v Re-active
planning.
• Testamentary trust is more ridged and
it cannot be altered.
• IV Trust is normally open ended with
regards to vesting date whereas a TT
usually has a fixed vesting date.

10. Role of independent trustee
• Now required after decision of Land &
Agricultural Bank v Parker.
• Shouldn’t just appear in name.
• Must be party to all decisions and should
attend all trustee meetings.
• His/her conduct could show if the trust is a
bona fide trust or a sham.

11. Roles and duties of a trustee
• Ensure that the trust property is adequately
insured.
• Funds are properly invested by measuring fund
managers performance to approved benchmarks.
• Determine the short, medium and long term
income and capital needs of the beneficiaries.
• Ensure that the provisions of the trust deed are
complied with and upheld at all times.
• Ensure that all the trusts’ statutory requirements
are complied with.

12. Roles and duties of a trustee
• Prepare and maintain a trust asset register
(investments and fixed assets).
• Conduct trustee meetings annually, bi-
annually or quarterly.
• Record minutes of the trustee meetings and
investment decisions.
• Maintain and safe keep the minute book.
• Ensure loan agreements are kept.

13. Problem clauses in trust deeds
• Dynamic document that must be reviewed
regularly. Tax laws and trust laws change.
• Experience at least 9 out of 10 trusts either
have wrong clauses or are missing clauses.

14. Examples
• The trust deed is drawn up in such a way that the trustees are subject to the
control of the founder in exercising their duties. The result is that,
although the founder gives up control in form, in substance this is not the
case.
• i) “The trustees have the authority to nominate and appoint additional
trustees of their own choice subject to the following:
– During his/her life Mr A has the exclusive right to nominate trustees for the
trust of his choice or to remove trustees at his discretion.”
• The mere fact that a founder has the right to appoint or remove trustees
should not in itself indicate that the founder/donor never intended to give
up control of the trust assets. As long as the appointment is in the best
interest of the beneficiaries, and not to protect the interests of the
founder/donor, then the substance of the trust should not differ from its
form.

15. Examples
• “Notwithstanding anything to the contrary herein
contained, for as long as Mr B acts as a trustee he
shall be entitled to veto any resolution proposed
by the trustees.”
• Where the veto right is structured positively in
the sense that one of the trustees (who is also a
beneficiary) can overrule the rest then this will
have negative implications with regards to income
tax, capital gains tax and estate duty tax.

16. Examples
• “All resolutions by the trustees will be taken by a
majority vote provided that the vote of Mr B is one
of the majority votes.”
• Where the right is structured as a ‘negative veto
right’ it appears as if this right does not bring
section 3(3)(d) or section 7(6) and section 71 into
operation.

17. Example
• “Mr C has the right to act alone in all matters
concerning the trust without consulting the other
trustees.”
• Once again this veto right is positively structured
in the sense that one of the trustees (who is also a
beneficiary) can overrule the rest. This will have
negative implications with regards to income tax,
capital gains tax and estate duty tax.

18. Example
• “ It is determined specifically that Mr D will have the right
to, in his will, prescribe the formula for the distribution of
Trust assets amongst the principal beneficiaries at the
termination of the trust, and this indicates which part of
the assets will go to which beneficiary and these
allocations need not be equal in size, value or extent.”
• If Mr D is the donor/founder, trustee and also a beneficiary
(especially a capital beneficiary) then it appears as if this
clause falls within the scope of section 3(3)(d).

19. Example
• Testamentary clauses often have the following supplementary clauses
added to neutralize the estate duty tax implications.
• “Notwithstanding anything else to the contrary stated in this deed, no
trustee shall at any time qualify as an income or capital beneficiary of
this trust or receive any benefits as such for so long as he is competent
to dispose of trust property for his own benefit or for the benefit of his
estate in the spirit and wording of section 3(3)(d) of the estate Duty
Act No 45 of 1955 or any later amendment thereof.
• “The reservation of the testamentary power shall never be interpreted
in such a way that the conclusion be drawn that the
donor/founder/trustee (who is given the right) has the right to allocate
the trust income or capital to himself or his estate.”
• Although the above clauses will neutralize the estate duty implications
they do not have the same effect with regards to the income tax and
estate duty tax implications.

20. Getting assets into a trust
• Donate but will attract donations
tax at 20%.
• Interest free loan.
• Bequest in terms of a will.

21. Taxation of Trusts
• Income tax and capital gains tax.
• Distribution to beneficiaries – Sect 25B
& paragraph 80.
• Attribution – Sect 7 & para 68 – 72.
• Taxation in the trust at 40% and 20%
CGT.

22. Inter Vivos Trusts
Taxation of trusts.
– Income tax
• Income is taxed in the hands of the trust at 40%. No
rebates are granted.
• Income is distributed to the beneficiaries and taxed
in their hands at their tax rates. Income retains it’s
identity.
• Opportunities through distribution i.e. university
fees for children and school fees for grandchildren.
• Attribution of income to the donor.

23. Example
• Ian and his wife Leigh-Ann have 3 children, namely
Lisa 20, Paul 18 and Greg 16. Ian and Leigh-Ann are
both employed and both earn in excess of the
maximum marginal rate of 40%. Lisa and Paul are
both at university and have no source of income and
Greg is still at school. In order to minimise his death
duties and on the advise of his tax advisor Ian
established an inter vivos trust. He transferred R5
million in cash and other growth assets to the trustees
and they in turn invested it in various portfolios. At
the end of the financial year the trust had earned
R120,000 in taxable interest income.

24. Example continued …
• The trustees can distribute income to Lisa and
Paul as they are both over 18. They would each
receive R60,000 which they need to declare in
their tax returns. Owing to the fact that they
receive no other income their tax liability would
each be R0. Both Lisa and Paul can now use these
funds to pay for their education.
• There is now no need to distribute to Ian or
Leigh-Anne or to retain the income and tax it in
the trust.

25. Inter Vivos Trusts
Taxation of trusts cont …
– Capital Gains Tax
• Gains are taxed in the hands of the trust at
20%. No rebates are granted.
• Gains are distributed to the beneficiaries and
taxed in their hands at their tax rates.
Maximum rate would then be 10%.
• Attribution of gains to the donor.

26. Trusts and your will
• Don’t take it for granted that you can
automatically bequeath assets to your IV trust. If
the definition of beneficiaries are too wide the
bequest could fail Braun v Blann & Botha.
• Leaving the primary abatement to an IV trust.
• Nominating a replacement trustee.
• Great opportunity to transfer fixed property as
there are no transfer duties.
• Section 9(4) of the transfer duty act.

27. Inter Vivos Trusts
Conclusion
– Ensure that one of the trustees is independent.
– Ensure that your trust deed is “compliant” with
current legislation and case law.
– Ensure that all the statutory requirements are
complied with i.e. trustee meetings, minutes of
all decisions etc.
– Ensure your will “compliments” your trust.
– Remember, both are dynamic documents and
should be reviewed on a regular basis!

28. WILLS

29. When should your Will be reviewed?
• At least every two years.
• If you have children/grandchildren.
• If you have offshore assets.
• If you get re-married/divorced.
• On the death of a spouse.
• If there are amendments to the tax act.
• If you have implemented any other form
of estate planning such as a trust.

30. Requirements of a valid Will
• Must be signed in the presence of two witnesses
(older than 14).
• Must be dated.
• Each page must be signed by the testator/trix.
• Must be signed in the presence of two witnesses
who do not benefit from the will and they, in turn,
must sign in the presence of the testator/trix and
each other.

31. Death duties in the estate
• There are 3 major ‘death duties’ in every estate,
namely:
• Executors fees: Normally levied at the official
rate of 3,5% + VAT. These are levied on the gross
value of assets which the executor must
administer.
• Capital gains tax. Calculated up to 10% depending
on the nature of the asset.
• Estate duty tax: Calculated at 20% of the dutiable
estate > R3,5m

32. Why is a Will important?
• With no valid Will you will die intestate.
• Dying intestate will lead to unintended
consequences with regards to
– Assets not benefiting the intended people
– Death duties
– CGT
– Appointment of Executor/s of choice

33. Example of dying intestate
Mr Jones passes away without leaving a valid
Will. He leaves behind his wife Mary, his
son Paul who is 18 and his two minor
children. His estate after all liabilities and
administration costs is valued at R10 million.
He was married out of community of property
excluding accrual.
The distribution of his estate including death
duties will look as follows:

34. Example of dying intestate cont..
• R10 Million is divided by 4, with a spouse
entitled to a Child’s share or R125,000, which
ever is the greater.
• Estate Duty would be as follows:
Total estate value R10,000,000
Less S 4q R2,500,000
Less abatement R3 500 000
Total estate Duty R4m x 20% = R800k

35. Dying intestate cont..
Mr Jones
Mary
R2,3m
Paul
R2,3m
Minor 1
R2,3m
Minor 2
R2,3m
Guardians
Fund
Guardians
Fund
Government run
Total estate duty cost = R800k

36. Example of dying intestate cont..
• Minor’s portion to Guardians fund.
• A correctly drafted Will would have:
- reduced estate duties.
- reduced CGT.
- and would have better catered for the
maintenance of a surviving spouse and minor
children.

37. Example of efficient planning
Mr Jones passes away and leaves R3,5m to his
children and the residue to his wife Mary. The
Will makes provision that if children are under 18,
their share will be held in Trust. His estate after all
liabilities and administration costs is valued at
R10 million. He was married out of community of
property excluding accrual.
The distribution of his estate including death
duties will look as follows:

38. vs efficient planning cont..
Mr Jones
Mary
R6,5m
Paul
R1,17m
Minor 1
R1,17m
Minor 2
R1,17m
Testamentary
Trust
Total estate duty cost = 0 Testamentary
Trust

39. Example of efficient planning
• Estate Duty would be calculated as follows:
Total estate value R10,000,000
Less S 4q R6,500,000
Less abatement R3 500 000
Total estate Duty R0

40. Types of planning in a Will
• Simple will using the spousal relief:
– Residue of estate is bequeathed to the
surviving spouse.
– Estate duty tax and capital gains tax are
deferred until the death of the surviving
spouse.
– Only surviving spouse would benefit from the
R3,5 million abatement.

41. Impact of basic planning
Mr & Mrs Smith each have an estate of
R3,5m. If they leave everything to the
survivor and the survivor passes away
shortly afterwards, only the survivors estate
would be subject to the R3,5m abatement
i.e. estate duties payable would be 20% of
R3,5m = R700 000.

42. Types of planning in a Will
• Advanced planning:
– The primary abatement of R3,5 million is
bequeathed to an inter vivos trust or a
testamentary trust and residue to spouse.
– This will save death duties in the surviving
spouses estate.
– Total saving amounts to
• 20% x R3,5 million = R700,000 (plus savings on growth
of investment)
• 3,99% x R3,5 million = R139,650

43. Example of abatement planning
Mr Smith
Testamentary
Trust
R3,5m
Less (S 4A) R3,5m
= 0
Mrs Smith
R3,5m
Beneficiaries:
Mrs Smith &
Children
Death Duties:
R3,5m
(R3,5m)
0
R3,5m

44. Types of planning in a Will
• Use of the primary abatement can also be
used in a foreign Will.
• Benefits:
– Make use of the tax free abatement.
– Creates a tax shelter for these assets offshore.
– Provides a vehicle to protect assets.

45. Separate Wills for foreign assets
• A valid South African Will is recognised in most
foreign countries, but certain countries probate
system do not accept our freedom of testation, for
example Greece.
• A South African executor is prohibited from
winding up assets outside S.A.
• Potential lengthy procedures if foreign assets
must be dealt with in terms of a S.A. Will.

46. Separate Wills for foreign assets
• Benefits of a foreign Will are:
– Separate administration of the estate carried out
in parallel to the administration of the SA
assets.
– An executor familiar with the procedures
required in those territories can save time and
therefore costs.
– An opportunity for early advice on any
potential taxation and succession dangers.

47. Separate Wills for foreign assets
• It is vitally important that where more than one
Will is in existence that both documents dovetail
together and do not have the effect of revoking
one another!

48. Usufructs in Will planning
• What are their drawbacks?
– The base cost for CGT becomes the very
low Bare Dominium value.
– They are extremely restrictive.
– They may lead to incorrect investment
decisions.

49. Example of usufruct
Mr Y leaves his estate of R10m to his
children, subject to a lifelong usufruct in
favour of his wife Mrs Y (65 years old).
Usufruct Value: R10m x 12% x
6,8109(PVF) = R8 173 080
Bare Dominium value = R1 826 920

50. Example of usufruct
Mr Y
R10m estate
Children
Value: R1,827m
Mrs Y (65)
Value: R8,173m
Base Cost =
R1,827m for CGT
Asset invested in cash,
Children have to agree
to any investment decisions
Bare Dominium
Usufruct

51. Example of usufruct cont...
• Base cost for children is R1 826 920 an increase
in CGT of at least R817 000.
• Mrs Y only wants the funds invested in cash as
she is only entitled to income and can’t benefit
from capital growth.
• Mrs Y’s children would have to agree to any
changes that she may want to make with the
portfolio.

52. ESTATE DUTY
AMENDMENTS

53. Abatement portability
• New legislation comes into effect on
1/1/2010.
• ‘To the extent’ principle is now
applicable.
• Is there still a need for the use of inter
vivos or testamentary trusts in a will?

54. Example
• Mr Smith has an estate of R3,650m and
Mrs. Smith has an estate of R3,5m.
• Mr Smith passes away bequeathing his
entire estate to Mrs Smith.
• Mrs Smith generates a 7% return on her
assets and survives Mr Smith by 10 years.
• Is there scope for an inter vivos or
testamentary trust?

55. No trust is used
• Value of Mrs Smiths estate in 10 years
= R14m.
• Executors fees @ 3,5% + VAT
= R558,600
• Estate duty tax
= R1,288,280
• Death duties (excl CGT) = R1,846,880

56. Trust is used
• Value of Mrs Smiths estate in 10 years
= R7m.
• Executors fees @ 3,5% + VAT
= R279,300
• Estate duty tax
= R644,140
• Death duties (excl CGT) = R923,440