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The estate duty savings are compounded over several generations
Articles on trusts are often aimed at settlors or donors to highlight the benefit of trusts and the role they play in estate planning at the ‘first-generation’ level. In this article, the author aims to illustrate to second-generation beneficiaries the effect of the decisions their parents took on their behalf to establish a trust in which to grow their assets.

The scenario
Client X retired 10 years ago, withdrew the tax-free portion of his retirement fund, and added this to other funds he held. He then placed the total amount on loan account into a family trust for the benefit of himself and his children.

The funds were invested on the JSE, the income from which was capitalised and used to repay Client X’s loan account.

Client X also made annual donations to the trust in the amount of the donations tax allowance. The result was that when Client X passed away recently, there was no loan account due to him by the trust.

As beneficiaries of the trust, Client X’s children A and B are aware that the trust was established for ‘estate planning’ purposes, but would like to know what this means to them in real terms.

Spelling it out
The returns of the JSE All Share Index over the 10-year period 31 March 1998 to 31 March 2008 can be illustrated by the results below.

  • 10 year total return (expressed as a percentage increase on initial investment): +368%
  • 10 year annualised return (expressed as an annual percentage increase): +16.68% p.a.

The effect of estate duty
Estate duty, levied at 20% on any estate valued above R3.5 million*, is taxed on the net asset value (NAV) of a person at the time of their death. For the example below, we assume that the individual’s primary residence and personal goods have a net asset value of R3.5 million, and that any investment portfolios held in the individual’s name are subject to estate duty.

  • 10 year total return (less estate duty): +274%
  • 10 year annualised return (less estate duty): +14.11% p.a.

Trust assets are not subject to estate duty
If we assume that an investment of R1 million was made on 31 March 1998 in the name of a trust, estate duty is not payable and the beneficiaries would enjoy a ‘saving’ of R936 000 as illustrated below:

  • Initial Investment on 31 March 1998: R1 000 000.
  • Value as at 31 March 2008: R4 680 000.
  • Estate Duty payable (if the assets had not been held in trust): R936 000.
  • Net value at 31 March 2008 had the assets been subject to estate duty: R3 744 000.

So much for the second generation. But what about the third generation? If, on the death of Client X, the trustees distribute the total assets of the trust to the individual beneficiaries A and B (R4 680 000), this amount plus any additional growth would once again be subject to estate duty of 20% on the death of either A or B. In contrast, if these funds were retained in trust or distributed to trusts for the benefit of A and their family and B and their family, there would be a further saving of 20%.

Cumulative savings
The effect is compounded over several generations. Assuming a continued growth rate of 368% per decade, an amount of R1 million placed in trust and invested in the stock market for a period of 30 years, representing three generations of beneficiaries, would result in a substantial saving of estate duty of around R16 million (20% of the portfolio total of approximately R81 million).

Published in Personal Finance Issue 317 (June 2007).

* Rates of Estate Duty have been updated to those applicable for the 2022/23 tax year.

Editor’s notes

The 10-year period from 31 March 1998 to 31 March 2008 was a particularly bumper decade for stock exchange returns, reflecting the combination of market exuberance that ultimately culminated in the 2008 financial crises, as well as (in South Africa) a higher inflation environment than what has been experienced in subsequent years.

However, even if one were to assume that asset values merely kept pace with inflation since 2008, it’s a fairly safe assumption to conclude that someone in a similar financial position to Client X in this example who is setting up a trust structure is likely to have an estate valued at around R9.5 million in 2022.

That said, with the JSE ALSI 40 index moving from 27 410 on 31 March 2008 to 68 529 on 31 March 2022 (an increase of 150%), if the entire 2008 portfolio was simply parked in Satrix 40 and left to ride the roller-coaster that was the 2008 financial crisis, the value thereof would be approaching R11.7 million. While this figure ignores costs, it also ignores dividends – which, in an instrument such as Satrix, would most likely be reinvested, thus greatly enhancing the returns.

One also needs to consider that the R3.5 million Section 4A abatement as well as the 20% estate duty rate for dutiable assets below R30 million has remained unchanged over the past 14 years, thus having not been adjusted at all to take inflation into account. In the meantime, the rate of estate duty for dutiable assets exceeding R30 million has since been increased to 25% (there was no upper limit previously).

Therefore, while the figures themselves (as presented in this article) will need to be significantly revised to take current circumstances into account, the principles remain relevant. However, since tax laws are constantly changing, it is strongly recommended that individuals with sizeable estates seek appropriate professional advice.

WRITTEN BY JENNY BOOTH

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

Jan Fourie

Director |  Attorney, Notary & Conveyancer | BA. LLB

Jan graduated in 1974 with a five-year BA LLB degree from the University of Stellenbosch, whereafter he was admitted as an advocate and prosecuted as such in the Cape Town and Wynberg Courts. In 1974, he joined Swemmer & Levin as the Candidate Attorney of Mr Levin (founding member) and was admitted as an attorney on 7 April 1976, as a conveyancer on 11 January 1978, and as a Notary on 19 December 1984. Since 1974, he has served in various committees, including the West Coast Chamber of Commerce, the Vredenburg School Committee, and the Malgas Lions Club. 

Furthermore, Jan was the author of the first bilingual law book, The New Debt Collecting Procedures (Die Nuwe Skuldinvorderingsprosedures), which was used by all the Magistrate Courts throughout South Africa. With the founding of the Small Claims Court in Vredenburg, Jan served as one of the first Commissioners. He is currently based at Swemmer & Levin’s Vredenburg office and has been with our firm for more than 47 years.

Pieter Smit

Director | Attorney & Conveyancer | BA. LLB

Pieter obtained his BA Law degree from Stellenbosch University in 1995 and his LLB degree from the North-West University in Potchefstroom in 1998. He served his articles at Marais Muller Attorneys from 1998 to 1999 and was admitted as an attorney in 2000 and as a conveyancer in 2002. Pieter is the founder of PP Smit Attorneys, which opened its doors in 2004. He also became a director of Swemmer & Levin in 2006. Pieter loves the outdoors and participating in all forms of sport, including tennis, golf, fishing, spearfishing, scuba diving, and hiking. 

Johann Maree

Director | Attorney | BA. LLB

Johann matriculated at Oudtshoorn High School and attended Stellenbosch University, where he obtained his BA Law and LLB degrees. Following his studies, he worked for three years as State Prosecutor at the Magistrate’s Court in Cape Town. Johann completed his legal training with the State Attorney in Pretoria and then moved to his hometown, Oudtshoorn, where he worked as a lawyer for a year. In 1983, he finally moved to Vredenburg and joined Swemmer & Levin, where he is still practising as a director. When he is not in the office, Johann enjoys cycling and in his earlier days, he used to be a long-distance junkie.

Richard Phillips

Director | Attorney | Bcom & BProc

After matriculating at Paarl Boys’ High School, Richard completed his BCom and BProc degrees at the University of Port Elizabeth. He served his articles with Van Wyk Fouchee in Paarl and quickly developed an affinity for litigation. Richard has always had a deep love for the ocean and when he was presented with an opportunity to join Swemmer & Levin on the West Coast, he agreed without hesitation and has been with our firm since 1997. Richard specialises in general litigation and divorces. When he is not in the office or with his family, he tries to spend as much time as possible in or on the water.

Jandré Smith

Director | Attorney | LLB

Jandré grew up and matriculated in the small Klein Karoo town of Oudtshoorn. He furthered his studies at the North-West University in Potchefstroom, obtaining his LLB degree during 2015. He completed his articles at Swemmer & Levin in 2017 and was subsequently appointed as a professional assistant. In 2020, Jandré was promoted to the position of director at the firm, where he practises in the Litigation department at our Langebaan office. When not practising law, Jandré is an avid sports fan. He has a passion for nature and enjoys camping, trail running, and mountain biking with his family.

Andre van der Walt

Director | Attorney | LLB

Andre graduated in 2015 with an LLB degree from the University of Pretoria. He later went on to obtain his NQF 7 Certificate in the Administration of Deceased Estates from the University of South Africa, which allowed him to further his career in deceased estates and the drafting of wills and trusts. Andre served his articles at Barnard & Patel Attorneys under the supervision of Mr YAS Patel. After being admitted as an attorney in 2016, he continued working at Barnard & Patel Attorneys as a professional assistant in the deceased estates department.

Andre joined Van Rensburg Attorneys in 2019 and was head of the deceased estates department until 2021. He then received the opportunity to move to the West Coast, where he joined Swemmer & Levin Attorneys. Andre loves travelling and enjoys the beauty that our country has to offer with his friends, family, and loved ones.

Harmann Potgieter

Attorney | LLB

Harmann graduated in 2018 with an LLB degree from the North-West University’s Potchefstroom Campus. He went on to study and grow in various fields, including doing a course on the Consumer Protection Act and a course at the University of South Africa where he obtained his NQF 7 Certificate in the Administration of Deceased Estates.

Harmann completed his articles of clerkship at Swemmer & Levin under the supervision of Mr Richard Phillips. After being admitted as an attorney in 2020, Harmann continued with Swemmer & Levin as a professional assistant in the deceased estates department as well as the litigation department. He loves to study, possesses a deep curiosity about the world, and is dedicated to giving back to the community.

Carla Cloete

Attorney, Conveyancer & Notary | LLB

Carla obtained her LLB at the North West University, Potchefstroom Campus in 2015. She completed her articles in 2017 with Brits Dreyer Inc in Bellville. She is an admitted Attorney, Notary and Conveyancer. After her articles she relocated to Kimberley where she worked as a professional assistant in the Conveyancing department of Van de Wall Inc. Coming back to her Western Cape roots, she now joins the Swemmer & Levin team as a professional assistant.