My next article to follow will be setting out my analysis of the effect of what are called "living wills". All too often one hears of cases where dying and incapacitated elderly are artificially kept alive on machines at huge specialist medical cost to the children (and of course medical aids) because all concerned can't make the horrible decision to cut off the support. If the person in question has indicated previously when in good health that if this position ever arises they want the machines to be turned off, it makes it so much easier for everyone. BUT the legal position doesn't seem to have been dealt with by the new Health Act notwithstanding sensible draft legislation prepared some 6 years ago by a specially set up Law Commission. If in the meantime you have any thoughts on the subject please send me an email. Now follows the 7th Epistle

 

1. TRUST-WRAPPED INVESTING

If an investor Trust founder lends a monthly amount to a Trust for the purposes of the purchase of unit trusts or shares in say Satrix 40, Estate Duty will be subject to the outstanding debt but the value of the share portfolio will be exempt from any form of taxation; the beneficiaries will be family members. On the other hand if it happens that the share portfolio has due to market conditions actually dropped in value, the Executor would be entitled to write off the difference leaving a capital loss in the hands of the estate and a counter-balancing entry in the Trust; i.e. a capital gain relating to the value of the “waiver” and loss of the share value in question. Take a fairly straightforward example of where an investor has a share portfolio valued now at R1m and sells it to a Trust with a base cost of say R650 000,00. The capital gain would be R350 000,00 which less the deduction would result in CGT of R34 000,00. Taking the same rate of growth as has already occurred (ie 10% compound) over say a 20 year period on the basis that the investor dies at that time, the Trust would be possessed of a share portfolio in the region of R7m and not be required to pay any cgt whatsoever. Had the shares remained in the investors name Estate Duty and CGT of approx. R2m would have been payable as against approx 20 000,00 being the Estate Duty payable on the interest free Loan of R1m to the Estate 20 years earlier. The loan would probably, however, have been paid off in any event via dividend distributions to the Investor at no cost or tax over the years.

 

2.2 With the appreciating value of property in South Africa at present at something like 30% p.a., it will be a simple calculation to determine how quickly the 28% end tax/duty payable is more than covered   by a payment of transfer duty now.  An example will suffice.  Take, for instance, a property now worth R1   million on which transfer duty of approximately R100 000, 00 would be payable if transferred to a Trust. Take it that the owner dies 12 years later when the property is worth R5 million equating to a total CGT and Estate Duty liability of approximately R900 000,00 (and allowing for all deductions).  Taking the sum of R100 000, 00 and compounding it by say 9% a year for 12 years would result a value of approximately R281 300, 00 which less CGT and Estate Duty will equate to approximately R200 000, 00 (but not including income tax on the interest!) all in, i.e. a difference in value of money in the hands of your family of R700 000, 00 in 12 years time.

2.3 The use of Testamentary Trusts is also invaluable as a way of creating a take up for the R1.5m deduction for   Estate Duty purposes. Often you will see a will leaving everything to “the survivor of us”. All very well but it results in an additional R300 000, 00 being paid to SARS the last dying because the R1.5m abatement has been lost in the Estate of the first dying. The testator may not wish to leave that kind of money to his   children straight out on death and therefore leaves it to a trust set up for the maintenance of the survivor and the children which in turn terminates on the death of the survivor, or whenever.

 

Under a discretionary Trust if the Trustees decide to distribute monies or assets or a gain made on the sale of an asset to a beneficiary, that income/ capital gain will be taxed in the hands of the beneficiary at that beneficiary’s marginal tax rate.  That beneficiary will be entitled to deduct any allowances that would otherwise have be allowed, any rebate or whatever including the primary abatement of R10 000, 00 per year for CGT.  Thus, take a Trust with four minor beneficiaries and distribute a capital gain amongst them and for a start one would deduct R40 000, 00 and thereafter CGT would apply at a quarter of their tax rates, i.e. in all probability 4½%!  The principle involved in Trusts is that provided you distribute any monies obtained by the Trust in the same year that they accrue, the tax consequences relating to such monies will be determined by the tax regime applicable to the beneficiary in question.

 

With a company at the end of the day it will be liable to tax at the rate of 29% and to the extent it distributes profits via dividends to an additional secondary tax of 12%, i.e. a total tax rate of 37% before monies are received tax free in the hands of shareholders.  Say that business is sold by the company and a capital gain results, the same situation will occur namely that the company will pay Capital Gains Tax at the rate of 14.5% and when distributing the balance of the capital gain a secondary tax at the rate of 12% totalling an overall tax rate of 24% i.e. 4% more than the worst case scenario for a Trust.  But now operate the business via a Trust and it is taxed at the marginal rate of the beneficiaries.  If the beneficiaries are other family Trusts with in turn individual beneficiaries, the same situation occurs.  There is an endless variety and possibility of how to distribute the monies because the character of the monies is never lost in the wash but retained.

 

This can be achieved within a week or two after sending a notarially certified copy of the Trust Deed to the local Master of the High Court with a R100, 00 revenue stamp, who then approves the appointment of Trustees.  Appoint trusted friends and family members as Trustees and there will be no administration costs.

 

A Trust has the simplicity that ensures that all capital appreciation of assets occurs under its aegis and not in an individual’s Estate which is subject to Estate Duty and a capital gain disposition on death.  It secures protection from any outside parties including creditors; it ensures that on death any beneficiaries and family members can continue to be provided for without having to await complicated Estate administration winding up processes and can continue for ever and a day.   Exactly the same advantage inures for an Off-Shore Trust but that’s another subject.