Estate Planning

As at the 1st April 2010 the relevant rates of tax were as follows:

Estate Duty – Estate duty is payable at the rate of 20% of the net value of assets in the estate in excess of the sum of R3 500 000,00. Estate duty is not payable on assets bequeathed to a surviving spouse. If the estate of a spouse does not utilise the whole of the abatement of R3 500 000,00, the estate of the last dying of the spouses may have the benefit of the unused portion of the abatement. Spouses therefore can enjoy a combined abatement of R7 000 000,00.

Capital Gains - Capital gains in a trust or company are taxed at the rate of 20% or 14% as opposed to up to a maximum of 10% in the hands of a natural person. A person who dies is deemed to have disposed of his or her assets for an amount equal to the market value of those assets at the date of death. The capital gain is taxed to the extent that it exceeds R120 000,00, subject to the proviso that assets transferred to a surviving spouse are treated as having been disposed of for an amount equal to the base cost of the assets. Accordingly the assessment of the capital gain and payment of tax on the capital gain is deferred until the death of the surviving spouse.

In the case of a natural person capital gains in any tax year up to a maximum of R17 500,00 are free of tax.

Donations - Donations of up to R100 000,00 a year are free of donations tax. Donations in excess of this amount, other than donations between spouses, attract tax at the rate of 20%.

Trusts - A trust pays income tax at a flat rate of 40%. The conduit principle applies to income, including capital gains, passed on by a trust to a beneficiary, so, subject to certain anti-avoidance rules, the income or capital gain passed on is taxed in the hands of the beneficiary and not in the hands of the trust.

The Estate Plan

In a growing economy aided by an inflationary environment the value of investments is likely to increase over time. The principal object of an estate plan is to "freeze" the value of an estate and thereby reduce or eliminate estate duty. A convenient means of achieving this objective is for the estate planner to transfer investments which are likely to increase in value with the passage of time to a trust created for the benefit of his descendants.

Trusts

1. A trust is brought into existence as a result of a contract between a donor and the trustees. The beneficiaries of a trust are designated in a deed of trust. A distinction is made between...