Many people are under the impression that estate planning is something only the "rich" have to consider. Think again.
Many middle-class people are sometimes unaware that their assets have been increasing in value and are worth more than the R1 million cut off when it comes to estate duty.
For the record: estate duty is payable on any amount exceeding R1 million at 25 percent on the amount in excess of R1 million. For instance, if your estate is worth R2 million at your death, your estate is liable for estate duty of R250 000.
However, it is important to be aware that there is no estate duty applicable between spouses, which creates the opportunity for some more elementary estate planning.
Asset inflation has a habit of creeping up on people and only when they add up the value of their earthly possessions do they realise that they should have done some planning.
Many young business people need also know that if they intend making it "big" in the business world, they also need to do some estate planning before they hit the boards of the Johannesburg Stock Exchange (JSE).
In recent years I've seen many young people make fortunes by listing their entrepreneurial companies on the JSE, making millions if not hundreds of millions of rands.
Often I've wondered if they had the foresight to put the shares of their companies into a trust before the rapid appreciation in the value of those shares.
I've spoken to many such people and I get the impression that they are so busy making their millions that they forget to get the basics in order.
If not, they have created a minefield of problems for their heirs some years down the road.
Trusts are used for a variety of reasons with estate pegging only one of them. Other reasons include protection of the rights of minors, control of assets as well as protection of assets, Trusts are normally set up during the lifetime of the settlor, called an inter vivos trust (between the living) or a trust can also be created on one's death, called a testamentary trust.
Basically when an inter vivos trust is set up the settlor (the person setting up the trust and injecting assets into it) either gives or lends to the trust the assets in question.
This creates a loan account between the trust, which is a separate legal entity, and the settlor.
However, as the loan is on the basis of an interest-free loan, the value of the loan cannot increase which effectively pegs the value of the loan.
On death of the settlor the loan has to be repaid on the original value, hopefully only many years later. This is called estate pegging.
Let's use a practical example:
You have just started a company which is valued at R1 million. You think it has the potential to make it "big" one day. You set up an inter-vivos trust, inject the shares into your trust which you, together with your other trustees effectively control. In many cases there are only two trustees but you can have more.
Your listing on the JSE duly goes ahead, you make a fortune and before you know it, the value of your shares is R11million, for example.
What you have done is saved your estate a potential R2,5 million in estate duty one day. The bigger the rise in the value of the shares the bigger the saving one day.
But you don't have to be in the big league to consider setting up a trust. Many South Africans have assets exceeding R1 million or have the potential of exceeding that amount.
Note: Estate planning is a complex issue, especially if there are various assets in the estate. It is important that you consult an attorney or a financial consultant who specialises in estate planning.