This is the final article on the presentation by Andrew Bradley, managing director of Capital Alliance Management Company, to the TMA/Personal Finance Truth about Retirement seminars. Esann de Kock reports on his views regarding trusts and estate planning.
Estate planning has not attracted much interest over the last decade or so, mainly because of a very generous estate duty dispensation.
Andrew Bradley, managing director of Capital Alliance Management Company, says some changes in this area over the last couple of years have, however, resulted in people taking more interest in estate planning.
He says there is a variety of instruments you can use for estate planning, including companies, closed corporations, inter vivos trusts and testamentary trusts. The two areas that Bradley's presentation focused on were inter vivos trusts and testamentary trusts.
INTER VIVOS TRUSTS
Bradley says the creation of a trust literally requires a great deal of trust in the beneficiaries and trustees that assist in its creation.
An inter vivos trust is a trust you set up when you are still alive. If you do this, you are referred to as the settlor and your role will be to place the capital into the trust.
You can do this in a number of ways:
* You can sell assets to the trust. But remember that when you create the trust it does not normally have any capital and therefore cannot purchase anything;
* You can also make a donation to the trust. Remember that any amounts over R25 000 a year donated to the trust will attract a 25 percent donations tax and that this may create some disadvantages; and
* Your third option, and the one most commonly used, is to loan money to the trust for its creation. The trust then owes you that amount of money.
Other rules that govern inter vivos trusts are:
* You have to create a trust deed to control and regulate a trust. This is referred to as the constitution of the trust and it regulates what can and cannot happen regarding the trust. For example, it indicates who is entitled to receive benefits, when the trust will terminate and who is responsible for the management of the trust;
* All trusts generally have a variety of beneficiaries who are entitled to receive the capital or income that is generated by the trust.
The trust deed can stipulate benefits or can stipulate a discretion to the trustees to allocate capital and income at their discretion to various beneficiaries; and
* The key benefit of an inter vivos trust is that you can place capital with the trust and allow all the growth to accrue to the trust. If you create a loan account of R1 million, on your death 20 years later, the trust will still owe you R1 million even though the value may have grown to R10 million.
This is referred to as estate pegging and is certainly a strategy that should be vigorously pursued for the benefits of paying less estate duty.
Other options in estate planning include the creation of a testamentary trust and the effective use of a will.
Everyone should have a will. But most of us perceive a will as a means of allocating our worldly goods.
Bradley says we should look a lot broader than this and consider the various financial planning and estate planning implications it offers.
He points out that within a will there are various estate planning mechanisms, including usufructs, bare dominium and other strategies that can be used.
When the creator of a will dies, a testamentary trust can be established for beneficiaries. A testamentary trust is thus formed after your death and will be initiated by your will.
Considering the fact that, when you die, the first R1 million of assets in your estate does not attract any estate duty and that none of the assets transferred to your spouse attracts any estate duty, it is important that you use all the options available to you.
Bradley says many people, in their will, stipulate that all their assets should go to their spouses to avoid estate duty.
But he says this is not the most effective way of structuring your assets. Instead, you should put the first R1 million in a testamentary trust for the capital benefit of children.
If you are survived by your spouse, he or she can be named as an income beneficiary and can get all the income generated by that capital during his or her lifetime.
By removing the first R1 million out of the estate and putting it in a testamentary trust, you will give your surviving spouse a further R1 million abatement on the remaining assets within the estate.
By using this strategy, the R1 million abatement can be doubled for a couple.