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Leaving a Legacy

On or after retirement, one normally consolidates your assets and you want to explore what options you have in getting the most out of your life savings. In other words, you want your money to “work” for you. Although it is a time when many clients consider downsizing, the majority wants to maintain their standard of living, and their independence, and definitely follow through on that special dream that was always postponed, like a trip abroad or spending more time doing community work. It is also a time when clients consider the maintenance and ultimate distribution of their wealth for the security of their loved ones.

The main risk that needs to be addressed during this stage is the preservation of your estate.

Clients often misunderstand estate planning as only consisting of the drawing up of a last will and testament for the winding up of your estate upon your, and/or your spouse’s death. With the right planning, however, plans can be put in motion with proper estate planning methodologies to not only preserve, but also create wealth in your estate during your living years.

Although there are some uncertainties regarding the future of certain elements of the trust tax regime, National Treasury announced in the first half of 2013 that the proposed changes to tax legislation regarding trusts will not take place immediately. The proposed amendments aim to eradicate income splitting opportunities afforded through this principle, but should have no effect on special trusts, created for the care of children or family members that need special care and treatment.

At present, the conduit principle operating in trust tax law, allows for income that accrues in a trust to be taxed in the hands of the beneficiary.

Consider the following simplified example:

Assume that there are three beneficiaries of a trust, who are natural persons. In the 2013/ 2014 tax year the trust earns interest of R75,000.00 on its invested capital. If the trust retains the interest and pays tax on it, it gets no exemption and the tax liability at 40% is R30,000.00. Now assume that the trustees award the interest in equal proportion to the three beneficiaries. The tax liability of each beneficiary will be as follows: interest income R25, 000.00, of which R23, 800.00 is exempt (this would be R34, 500.00 for a beneficiary older than 65). The taxable balance is thus R1, 200.00 on which, even at the maximum marginal rate of 40%, the tax would be R480.00. The total tax payable on the interest would thus be R480 x 3 = R1, 440.00.

Pentagon Financial Solutions PTA (Pty) Ltd can assist the client in estate planning, the drawing up of a trust and give guidance in the choice regarding trustees.