1. Asset Protection
One of the most important aspects of this document is to highlight the exposure an individual assumes once they enter the business arena or the residential or commercial property market.
The vagaries of carrying on a business are many and varied and include but have not limited to:
- Potential claims for damages;
- Claims by employees, financiers, landlords, business creditors and sureties;
- Claims for financial damages.
In order to mitigate and guard against these risks, one needs to place their assets in a Trust. This protects the assets against risk from all potential claims and creditors.
2. Divorce
The current statistics indicate a high rate of divorce in South Africa. The reality is that this is highly probable. One should bear in mind that a Spouse could be your biggest creditor in the event of the relationship ending. By placing all ones assets in a Trust, in the event of a divorce the assets will be secure from any claims emanation from the divorce.
3. Business creditors
If the business is conducted as a Sole Partnership or Partnership all the creditors of the business are the creditors of the individuals conducting that business. These business creditors can attach all the individual’s assets to satisfy any claims due to them. In many instances claims may arise by default or due to no fault or cause of the individual, such as the death, sequestration, or default by the individual’s business partner, or a claim by an employee against the business, or SARS for taxes due which your accountants failed to reflect and pay, or an employee causing damages or losses and as a result a claim emanates which become the responsibility of the business, etc
- Further claims by the following third parties may emanate;
- The individual’s personal business, financiers, lender and bankers;
- Landlords;
- Statutory bodies such as municipalities, UIF, SARS;
- General creditors;
- Personal Accounts Payable;
- Personal claims;
- Repudiated and unpaid insurance claims
- Sureties
Whilst a Trust offers asset protection against creditors as stated above, it is important to note that whilst the are any loans or claims against a Trust by any person, the Trust could be exposed to creditors of that person. The reduction of the loan account is therefore of paramount importance.
4. Benefits on Death
4.1 No capital gains on death
Capital Gains Tax (CGT) is a tax levied on the event of the disposal of an asset. There are also certain deeming provisions, even though an asset or assets have not been disposed of. The death of an individual is such a deemed event. The deceased is deemed to have disposed of their estate to the deceased estate and this triggers the tax on all assets (there are certain exemptions and rollovers) which have increased in value since October 2001, or assets acquired after October 2001 that have increased in value. By having the assets in a Trust this will be avoided.
This deeming event triggers the tax which is payable even though no consideration has been received. This places the estate in extreme distress from a cash flow perspective.
4.2 No Estate Duty
On the death of an individual an estate duty is due on the net value of all assets in excess of the abatement amount. The abatement amount, which is stipulated in the Estate Duties Act, allows for a certain amount of your personal estate to be free of any duties when determining the liability of the deceased estate for estate duties. The form of tax is 20% of your net estate in excess of R3 500 000.00. Whilst this is a very generous amendment, R 3 500 000.00 is not an ambitious goal to aspire to in the future. Therefore all amounts exceeding this figure will be taxed at 20%. Effectively this is a tax on after tax assets and cash and investments. By having a Trust in place this is avoided.
Estate duty is also levied on non-resident persons owing any property in RSA. Property is widely defined to be any asset, movable, immovable, investment policies, and interest in any asset and or business interests.
It is very important to note that there are also deeming provisions in the Estate Duties Act, which will render certain assets to be property of the deceased for estate duty purposes, even though the deceased does not own the assets. The ambit of the clause is very wide and the parameters are set out at clause of the Estate Duties Act. A few examples are usufructary and fiduciary rights, certain annuities, interests in property, assurance policies and insurance policies.
It is critical to establish the correct structure in order to ensure that an individual pays a minimal amount, if not zero death duty. An average estate will pay approximately 30% of any net values of such estate. All assets, business (huge value) properties, movable assets, investments, cash, Unit Trust, shares, time share, deemed assets, ets. All of these assets are valued and will form part of the estate of the individual, after deductions of debts and certain exemptions have been deducted, the balance of the assets will be taxed at the mentioned rate of 20% of the estate in excess of 3.5 million rand.
The solution to this frightening proposition is simple, by establishing a Trust and ensuring that all the assets are held in Trust. On the death of the individual they should pay zero estate duty.
4.3 No executor’s fees
On the death of an individual an executor is appointed to wind up the estate, the executor/executrix will receive a maximum fee of 3.5% plus VAT, the equivalent of just under 4% of the GROSS value of your estate. Coupled with the 3.5% plus VAT, the Executor is also entitled an administration fee of 6% on any assets the handle whilst they are winding up the estate.
By placing assets in a Trust, this can be avoided. Whilst the percentage the Executor earns is small, it results in a large amount being paid out of the estate. The fee can be set lower. However, very few professionals will act for less than the fee stipulated in the act.
4.4 No costs on death
There are a number of other costs, which arise on the death of an individual, such as, costs to cancel bonds, and the costs to transfer any properties as the estate cannot be wound up if there is any debt in the estate.
If the individual wishes to have a Beneficiary/Heir inherit the property they will have to take transfer of the property, which entails the payments of transfer costs. As in most instances the Heirs/Beneficiaries do not tend to have the funds or liquidity to pay them. This usually results in the estate paying them and reducing the Heirs benefits and entitlement. Assets in Trust will ensure these costs are minimised, if not completely avoided.
It is important to note that there is a provision made in the Transfer Duties Act that exempts the parties from transfer duty on the event that a property is transferred from a deceased estate to an heir or beneficiary. So whilst there will be no transfer duty payable, there will be transfer fees and ancillary costs.
4.5 Protection of minors
Our law does not allow for minors to directly inherit, as they do not have contractual capacity. An individual who wants to leave all assets to minor persons will not be able to do so, or persons not adequately addressing the issue in their Will, may end up with a situation where all the assets must be liquidated into cash on their death, as the Guardians Fund does not administer assets other than cash. The Guardians Fund, which can only hold cash and pays a very low interest rate, approximately 2%.
This is absurd when comparing the returns that can be achieved by merely investing the cash or the growth achievable on property, business or other assets. In the event monies are not claimed, the funds are forfeited to the state for good measure.
In the interim they will have limited or no access to the funds for their needs, education, health, wellbeing, housing, etc.
Your dream of passing on your business or property portfolio to your children is impossible as the Guardians Fund can only hold cash.
The Solution is to have all the properties in a Trust which survives the death of an individual and any Beneficiary may benefit and access immediately. Also bear in mind that property administration by your appointed Trustees will accrue at a much better rate than Guardians Fund at 2% plus inflation. On the event of the vesting of assets or entitlement to benefits they will have access to great business or property portfolio.
5. Estate Freezing
On the death of any individual, their estate is frozen, this transpires in order for the executor to wind up the estate, i.e. collect assets, pay debts, taxes, and only after that to make our bequests and then distribute benefits to the Beneficiaries/Heirs. All the while the Spouse and dependants of the deceased have no access to any monies or assets. A complex estate could take numerous years to wind up, sometimes between 2 – 5 years or longer.
This needs to be contrasted with the position where the Trust owns the assets and cash, which is then immediately available and accessible versus a situation where the individual dies, and all the assets and cash are tied up in the winding up process, causing undue hardships to a Spouse and dependants.
6. Continuity
In the event that the individual does not or has not structured their affairs and interests, this creates serious problems, as the assets, cash, business interests and property portfolio may not continue after the death of an individual. In the event that there is immovable property or a property portfolio, this will cease and have to be liquidated, as all bonds need to be settled. A business which is not properly structured will come to a grinding halt.
When calculating the taxes along with the costs on death, as listed above, the estate is usually depleted and not much will be left over, as most assets will end up being sold on auction or sold at far below their market value to ensure a quick sale as to wind up the estate.
This is totally defeating the objective of creating wealth and establishing and running a business or a property portfolio what will continue to deliver benefits to the individual and their Spouse and dependants after their death.
We re-iterate that there is no necessity for a Trust to terminate. A Trust does not die and can therefore continue in perpetuity. This follows for the continuation of the assets, business interests, accrued wealth and a property portfolio which allows for future generations to benefit from the individuals efforts which will be shielded from costs on death, no transfer, no cancellation of bonds, there is no estate duty, CGT or executors fees. There is no need to liquidate assets to cover costs of death.
7. Succession planning
Trusts allow for the best mode of succession planning as the South African Trust Law allows for a Trust to continue in perpetuity.
A properly drafted will be executed in order to ensure that the individual does not die intestate.
The Will also allows the individual to capitalise on various estate duty exemptions, transfer duty benefits and certain tax relief.
Section 4q and Section 4A abatement benefits must be capitalised on. It is crucial to ensure that certain Capital Gains Tax consequences are not inadvertently triggered.
Source – Trust Specialist
Should you need a Trust Formed – Click Here to Place an order! – or simply Call Mumbi Legacy at 011 392 2550. Click Button below to claim R2,000 voucher for Trust Registration
[sh_btn link=”http://bitly.com/mumbiregistration” target=”_blank” shape=”square” style=”flat” size=”medium” color=”rgb(26, 150, 49)” bordercolor=”rgb(1, 0, 0)” bordersize=”0″ fontcolor=”rgba(252, 252, 252, 0.97)” enablehover=”enable” enableicon=”disable” iconbg=”flat” icon=” fa fa-glass”]Claim R 2,000 Trust Registration Voucher[/sh_btn]
