Estate Planning is a solid and secure way of ensuring that in the event of your passing, the assets of your estate are passed onto your beneficiaries in the most tax efficient and financially effective means possible.
The Experts at Aliberti will provide you with the practical solutions to give you peace of mind that in the event of your death, or in cases of incapacity, your estate affairs are in order. Whilst death and estate duties may no longer be applicable, our experts can help you to navigate your way through the various regulatory complexities such as Capital Gains Tax, Life Insurance and Pension entitlements, all of which are likely to be affected upon your death or incapacity. We will work with you to maximise the amount of your assets that are passed on to your loved ones or favourite organizations, and legally minimise the amount of tax that is payable.
It is often/mostly impossible to know when your time will come. So, rather than leaving your family, business partner or trustee to deal with the numerous uncertainties, we recommend that you consider the following:
• Is your will current?
• Should you make death benefit nominations?
• Should you have an enduring power of attorney?
• Will there be enough assets for your children or family’s education?
• Can others challenge your will?
• Have you the right testamentary structure to minimise taxation?
• Do you need to transfer control of your family trust or company?
• Will your business partner buy out your share in the partnership in the event of your passing?
• Do you need to appoint guardians for your children?
• Should you set up a charitable trust or foundation to fulfill your intentions (legacy)?
Considering your own mortality is not a subject any of us likes to dwell on, however as the old saying goes, death and taxes are life’s absolute certainties.
The importance of a trust in estate planning
Trusts are typically used to pass assets efficiently and privately onto your heirs, and to protect minors if you pass away.
This article explores some of the conditions and benefits of setting up a “living” trust or inter-vivos trust – one that is set up while you are still alive – a testamentary trust – one that comes into effect when you pass away. An inter-vivos trust is different from a testamentary trust, which is created by the terms of a will and commences only from the date of your death.
What is a living or inter-vivos trust?
An inter-vivos trust (meaning “between the living” in Latin) is created by writing a trust deed which commences at that time i.e. while you (the planner or settlor) are alive. With an inter-vivos trust, you will typically place property and other assets in the trust during your lifetime, but this has tax implications. The distribution of those assets during your lifetime, and upon your death, takes place according to the terms of the deed.
Benefits of an inter-vivos trust in estate planning
1. Immediate estate planning – An inter-vivos trust is effective immediately, which means that you (the planner) can start estate planning immediately.
2. Estate duty avoidance – The growth in investments and other assets housed in the trust are not subject to estate duty (from the date they were included in the trust) when you pass away.
3. Save executor’s fees – When you die, executor’s fees are not charged on the assets that are in the trust.
4. Smooth transfer to beneficiaries – The “winding-up” process of your estate is smoother because, by creating a trust, you have already given instructions on how assets, property and investments should be distributed among your beneficiaries.
Should a life policy be placed in a trust?
The question often arises as to whether a trust should own one’s life policy.
A trust-owned life policy is almost always subject to estate duty on the death of the life assured as it is a “deemed asset” in terms of the Estate Duty Act. Therefore, there is no estate duty benefit to a trust owning the life policy. However, there is a limited benefit in that the premiums paid by the trust (compounded at 6% per annum) can be deducted against the estate duty payable on the life policy.
The real benefit of a trust owning a life policy is protection of the policy proceeds on the death of the life assured. For example, if you want your life policy paid to your children, who are still minors at the time of your death, then a trust is an ideal structure for your life policy. Having the trust own your life policy would ensure that on your death the proceeds are paid to the trust and are looked after (by the trustees) for your children, or any other beneficiary.
What are the costs of an inter-vivos trust?
It is important to consider the initial and ongoing costs of setting up and using a trust for estate planning.
Drafting fees to create the trust deed can range from anything upwards of R5 000. In addition, a trust will be required to submit an annual tax return, meet basic compliance requirements, and produce basic financial statements, minutes of trust meetings and trust resolutions. All these require the involvement of professionals, which comes at a cost.
Your legal adviser is best placed to guide you through the benefits as well as initial and ongoing costs of setting up a trust.
A testamentary trust (meaning “relating to wills”) only comes into effect on your death. This means that all the costs of the trust are delayed until your death, and are paid out of your estate. However, it also means that you cannot use the trust for estate planning during your lifetime.
How does it work?
As a single parent, you want your minor child to benefit from the proceeds of your life policy, but cannot afford to set up an inter-vivos trust. What should you do? Although in this instance it would be preferable to set up an inter-vivos trust, if you cannot afford to do so, the next best thing is to use a testamentary trust. This means that you must ensure that you have a will completed and signed at the same time that you take out the life policy.
The testamentary trust can be made the beneficiary of your life policy. To ensure that this is accurately recorded, it is important that you use the correct wording on the beneficiary nomination form. The beneficiary should be “the testamentary trust created in terms of my will”. It is extremely important that you do not record your estate as the beneficiary of the life policy as this means the proceeds of your life policy will be tied up with your estate when you pass away and subject to executor’s fees. In this case study, making a testamentary trust the beneficiary of your life policy allows you, as a single parent, to be sure that the proceeds of your life policy will be looked after and used for the benefit of your minor.
Please speak to your financial adviser for advice related to setting up a trust or to refer you to a legal adviser