Estate planning in your personal name
Estate planning involves the effective structuring of assets so that they may be transferred to the people nominated by you, in your will, without paying unnecessary taxes or estate duty. Proper estate planning will also reduce uncertainties regarding your estate upon your death.
One of the major disadvantages of your estate devolving in terms of a will is that your entire estate is frozen upon your death, including bank accounts and any bank accounts held jointly. Therefore, if you have a spouse and/or minor children dependent on you, this method would not effectively cater for their needs whilst your estate is wound up, which could take several months.
In terms of Section 4A of the Estate Duty Act 45 of 1955 (hereinafter referred to as “the Act”), each persons’ estate is entitled to an exemption on assets of up to R3.5 million. Estate duty of 20% is levied on assets that exceed the R3.5 million exemption, except where assets are transferred to a surviving spouse.
Section 4A(2) of the Act allows for the surviving spouse, who subsequently passes, to utilise the remainder of the exemption of the first-dying spouse, if any. Therefore, if for example the first-dying spouse only utilises R2 million of his/her exemption, the balance of R1.5 million will be added to the second-dying spouse’s exemption. The second-dying spouse will therefore have an exemption of
R5 million available to him/her.
Where spouses die simultaneously, the spouse with the smallest estate will be deemed, for the purposes of Section 4 of the Act, to have died first.
There are several advantages of establishing a trust for estate planning purposes. One of the most notable is that the trust does not “die” when you die. Therefore your estate is not liable for estate duty.
Further to this, all growth on assets of a trust is similarly not subject to estate duty as the growth on such assets is attributed to the trust.
A further advantage of a trust is that the assets are not frozen upon death and the trust can therefore continue to support your dependants upon your death. This is often considered as a major advantage as it could take several months to wind up a deceased estate. During that time, your dependants will not have access to assets like, for example, bank accounts.
Furthermore, the assets of the trust can be protected from creditors. This is only the case if the trust is not an alter ego, as held in First National Bank v Britz and Others  ZAGPPHC 119; 54742/09
(20 July 2011). If a trust is being used merely to protect assets from creditors in your estate and you are in control of the trust and its assets, it may be found that such trust is an alter ego and the court can declare that such assets are in fact personally held by the founder and should therefore fall within their personal estate.
Conversely, a trust also places many duties on the trustees. A high level of responsibility is placed on trustees and they are expected to act diligently, carefully and independently, in the interest of the beneficiaries and in accordance with the trust deed. Trustees can be sued for not carrying out their duties properly.
Furthermore, trust administration can be costly and time consuming as proper records must be kept and tax returns submitted. Trustees are expected to be meticulous with documentation of transactions by the trust, bearing in mind that their objective is to act in the interest of the beneficiaries.
Testamentary trusts (mortis causa) are the most common form of trusts used in estate planning as they only come into existence after the death of the testator. These trusts are especially beneficial where a testator wishes to protect minor children or dependants who are not capable of managing their own affairs.
A testamentary trust is formed by the testator inserting a trust clause into his will, which serves the same purpose as a trust deed.
The trust is administered by trustees appointed in the will and usually comes to an end after a predetermined period or event, for example when a minor child attains the age of majority.
Assets that form part of a deceased estate may be moved to this trust by trustees who are appointed in the deceased’s will.
Choosing the most effective way to plan your estate depends on your personal circumstances. As seen from above there are several pros and cons to each model and it is up to you to decide what is best suited for your personal circumstances.
Estate planning in your personal name attracts estate duty at 20% of assets over and above the R3.5 million exemption. Should your estate be in excess of R3.5 million you may wish to consider a trust or a testamentary trust. Further, upon death, the estate of the deceased is frozen pending finalisation.
A trust places many onerous duties on the trustees. Running a trust is costly and there is always a risk that such a trust could be set aside if it is proven to be an alter ego of the founder.
A testamentary trust is only created upon the death of the testator – there are therefore no costs involved with the trust prior to the testator’s death. There is therefore also no risk that this trust could be set aside on the basis of it being an alter ego. Further, your dependants can continue to utilise the trust assets while your estate is wound up. You also have the benefit of not paying estate duties.