The state of estate planning
Willie Fourie, Head of Fiduciary Services at PSG Wealth.
New legislation may affect your clients.
Parliament has passed the much-awaited Taxation Laws Amendment Bill after the Davis Tax Committee’s investigation into income tax reform. Section 7C of the proposed legislation deals with the taxation of interest-free loans to trusts, which may be far-reaching in its impact on your clients if they have a trust.
“You should encourage your clients to actively review any trust structures and estate plans that they have in place to ensure that they aren’t negatively affected by the coming changes,” says Willie Fourie, Head of Fiduciary Services at PSG Wealth.
One of the main benefits of a trust is that the ownership of the assets of the trust is separate from the use and enjoyment of those assets. Estate owners can separate themselves from assets that would otherwise attract estate duty. “Until now, this has meant that the trust becomes the owner of these assets without having to pay for the assets. As the estate owner is no longer the owner of the asset, the future growth of the value of the asset is not taken into consideration for estate duty on the deceased estate,” he says.
This has created some negative perceptions around trusts and taxation. Despite ongoing legislative changes that have resulted in several anti-avoidance provisions in the Income Tax Act, SARS continues to view trusts through a negative lens from a tax point of view. “The changes have, to a large extent, negated the effectiveness of a trust as an income tax planning tool.”
The most significant change that the legislation introduces that the interest charged on the interest-free loan (currently 8%) will be deemed as a donation by the lender. This will be subject to 20% donations tax. However, the annual donations tax exemption of R100 000 may be deducted.
Not all trusts will be affected
Certain exemptions have been provided for and the following trusts will not be affected by the legislation:
• public benefit organisations
• a fully vested trust
• a special trust as defined in the Income Tax Act
• where the loan to the trust is used to purchase a primary residence for the lender
• the loan is a Shari’ah compliant transaction
Your clients should review their overall plans
As always, getting specialist legal and tax advice is paramount, especially given the potentially troubled waters ahead for trusts. “Revisit the original thinking behind your clients’ trusts and estate plans. Clients may be inclined to a knee-jerk reaction to the legislation to get rid of any trust loan account. But doing so could have further tax consequences for the trust,” Fourie says.
Advise your clients that if they dispose of assets to repay the loan account, this could trigger the requirement to pay capital gains tax. It is also difficult to settle loan accounts properly as in many cases neither the trustees nor the beneficiaries know what the value of the loan accounts are, as the financial statements are not always up to date. In addition, they need to consider the reason the trust was originally set up, such as to protect the rights of minor children or beneficiaries that are unable to manage their own affairs independently.
“We suggest that you ensure that your clients’ estate planning is up-to-date and aligned to the new legislation before it is introduced in March next year. As such, you should encourage your clients to do a holistic review of their estate and financial planning,” Fourie concludes.
