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Overview

Ever considered the fact that your death could tie up your estate so badly that your family will be left without an income? Or that your business assets
could be tied up so tightly that your company cannot operate or remains at the mercy of your unsettled estate?

There's no need to see your life's work go to waste due to a non-executable will. Just plan properly to spare your next-of-kin and business partners as
much trauma and inconvenience as possible.

Further, safeguarding the financial interests of your loved ones is your biggest priority when it comes to planning your estate: ensuring that the needs of
your family and minors are taken care of, and that estate duty and income tax liabilities are kept to a minimum.

Setting up trusts and draughting wills could be legally complicated. It requires specialised legal knowledge. Contact your advisor to attend to your:

• Will
• Estate administration
• Trust administration
• Inter vivos trusts

How will a Trust benefit an Estate Plan?

Assets transferred to a trust will not be included as property in your estate and, as such, no estate duty is payable on those assets. Assuming that the
assets are transferred to a trust through a sale on loan account, the outstanding balance of the loan will, however, constitute an asset in your estate and
thereby attract estate duty. By contrast, a transfer to a trust through a donation of the asset, will attract an immediate liability for donations tax at a rate
of 25%.

The two most common trusts are the testamentary trust and the inter vivos trust.

A testamentary trust is a trust, the terms and conditions of which are set out in a will. It is established upon the death of the estate planner. The benefits
of such a trust include:

• The protection of assets.
• The minimisation of future estate duty for beneficiaries.
• The welfare of minor heirs, spouse and any other beneficiaries

An inter vivos trust is a trust set up through a contract drawn up and put into operation during a persons lifetime. It will continue to operate without
interruption upon the death of the estate planner.
It has the same benefits as a testamentary trust, but, in addition-

• There is no delay in the implementation of the trust after death, as the trust is already established and operative.
• The planner can be a trustee and/or a beneficiary during his lifetime, provided that he is not the only trustee and beneficiary.
• The pegging of the value of assets held by the trust

In Brief...

Estate duty is the tax payable on the dutiable value of an estate. The first R1 000 000 (one million) of the dutiable value of an estate is estate duty free.
The amount in excess of one million rand is taxed at a rate of 25%.

In order to calculate the dutiable value of an estate, a number of deductions are allowed, the most important being the one which allows as a deduction
all bequests to the spouse of the deceased. This deduction is useful in estate planning. It does however mean that an estate duty problem is potentially
transferred from one estate to the other, in the sense that the surviving spouse's estate will be liable for estate duty at her/his death.

As a result, the most effective estate planning strategies involve the transfer of assets prior to the death of the estate planner, rather than bequests in the
planner's will. A common strategy to reduce estate duty is to create a trust, and to transfer assets to the trust by means of a sale at market value of the
assets. As payment for the assets, the trust creates a loan account in favour of the planner, with no terms in respect of interest. The growth of the assets
now falls outside the estate, although the value of the loan account (if no payments were made to the planner) remains an asset in the estate.

Where a trust has been created, it is also possible for a planner to reduce the dutiable value of his estate by donation to the trust each year of the
maximum amount which is not subject to donations tax. This amount is currently R 25 000, and if both the planner and his/her spouse donate the
maximum amount each year (in other words R 50 000 per year), considerable accumulated estate duty savings may be achieved in this way.

What are estate planning rules?

These are the vehicles through which an estate can be planned.
The most important ones are wills and trusts, but other tools include:

Donations
On a very simplistic level, planners can reduce the value of their estates by sing the annual donations tax exemption of R25 000. Any amounts donated
that are more than the exemption, will attract donations tax at a rate of 25%. In addition, it is important not to overlook that donations between spouses
are exempt from donations tax.

Companies
Companies are sometimes used either in isolation or in conjunction with a trust. In essence, some estate plans take the form of an inter vivos trust which
holds all the ordinary shares in a family company. All the planners growth assets are sold to the company in exchange for preference shares. Through
this mechanism the planner has a degree of control over the company. It is, however, important to ensure that this control is limited so that it cannot be
used to benefit the planners or their estate.

Limited interests such as fiduciary or usufructuary
The bequest of a limited interest which includes a usufruct or fideicommissum can, in certain circumstances, be effective in estate planning. Estate duty
advantages can be achieved by providing that on the death of the fiduciary, the property will devolve on the succeeding beneficiary for a short period.
After this, full ownership of the property will pass to the ultimate beneficiary. To this extent, the interest will be valued with reference to the short period
for estate purposes, leading to substantial estate duty savings.

Did you know?

• You only have three months' grace to change your will after a divorce. If you die after that period and have not yet changed it, your spouse will inherit as
   you intended before the divorce!

• If you draw up a will and later make a second one, revoking the first, and then decide that you prefer the first one and destroy the second one, you
   cannot assume that the first one will become valid again. The proper process to revalidate a former will is to draw up a reinstatement document.

• There are limits as to what you are allowed to provide for in your will. You may not contravene any laws (obviously), but you may also not act against
   public interest. If you were to leave an inheritance to your daughter on the condition that she must first divorce her husband, this would be rejected on
   moral grounds.

• A dog collar trust is the name for a trust where the planner (who is also a trustee) has the right to remove or appoint trustees. If the planner is also a
   beneficiary in this type of trust he will not be eligible for an estate duty saving as he has not handed over full control of the trust assets.

• Where a testator is married out of community of property and subject to the accrual system, the spouse will in the event of disinheritance by the
   deceased spouse, still have a claim against the estate for one-half of the accrual. She would also be in a position to bring an action in terms of the
   Maintenance of Surviving Spouses Act.

• If you and your spouse have children, and you die without leaving a will, then the surviving spouse will only inherit a childs share. For example : Fred
   dies without a will, leaving behind four children and his wife, and his estate is worth R1 000 000. The estate is split as follows : R1 000 000 / 5 (4 + 1) =
   R200 000 each.

• If the children are all minors, and there is no will to direct what should be done with their inheritance, then the R800 000 due to them will be paid into
   the Guardians' Fund, under government administration, until they become majors.

• If one trustee (in an instance where more than one is appointed) is found to be negligent or corrupt, ALL of the trustees can be sued, as they are jointly
   liable and responsible for the trust. This holds true even if the other trustees had no idea of the guilty partys misdemeanors.

What is estate pegging?

This is one of the best ways of reducing estate duty and is more effective the earlier it is implemented, which is why the sooner you plan your estate,
the better.

One of the tools used to peg an estate would entail the establishment of an inter vivos trust. Another option would include the establishment of a company
whereby the planner merely holds preference shares with the ordinary shares being held by an inter vivos trust or the planners family. If you transferred
some of your growth assets into (for example) a trust, they would no longer form part of your estate. To avoid donations tax you would normally sell your
assets to the trust through an interest-free loan. This loan would usually be due and payable on demand. As mentioned, the outstanding balance owing
on the loan would constitute an asset in your estate. If you died 15 years after transferring your assets, the value of the assets will have quite likely
quadrupled, but the value of the loan at the original asset value is the amount that will be included in your estate. Thus your assets will have been
"pegged" at the value of 15 years prior.

For example:
Assets of R10 000 000 were sold to a trust set up by Michael. 15 years later, when Michael died, those assets were worth R25 000 000. His personal
estate was valued at R2 500 000. If he had not transferred the assets to the trust then he would have been liable for estate duty on:

R27 500 000 less the R1 000 000 rebate = R26 500 000 x 25% [R6 625 000]
However, through estate pegging, the estate duty payable will be :
R12 500 000 less the R1 000 000 rebate = R11 500 000 x 25% [R2 875 000]

This illustrates a saving of R3 750 000.