An effective and popular way to achieve this is by transferring the farm to a trust. By doing this, the farmer gives up ownership and control of the farm to the trustees of the trust for the benefit of the beneficiaries.
The farmer will have to decide should the transfer happen during their lifetime or at death.
A few advantages of using a trust include:
- Protection of property against the farmer’s (or trustees’ and beneficiaries’) possible insolvency or divorce.
- The growth in value of the farm takes place in the trust, possibly reducing the farmer’s dutiable estate.
- Saving on executor’s fees (no executor’s fee is paid on trust assets).
Transfer at death
Transfer of ownership at death can be by bequest to a trust created in the farmer’s will (‘testamentary trust’) or to an existing trust (‘inter vivos trust’).
The farmer will remain the owner of the farm until they die and farming activities can continue undisturbed.
As with the transfer of property to heirs, this transfer could have tax implications, in terms of estate duty, VAT and capital gains tax (CGT).
Transfer during lifetime
The farmer is the owner of the farm and enjoys the right to dispose of it as they please. They can choose to sell or donate the farm to the trust.
Donation to the trust: An advantage of donating the farm is that it’s removed as an asset from the farmer’s personal estate; any future growth of the farm takes place within the trust.
Also, the farmer’s estate will not attract estate duty in relation to the farm.
However, the donation will attract donations tax (at 20% in respect of taxable donations not exceeding R30 million and 25% in respect of taxable donations above R30 million).
The first R100 000 of the donation is exempt from donations tax per tax year.
- Sale to the trust: The farm must be sold to the trust at its current market value. If it’s not sold at market value, it could give rise to donations tax liability as the sale would be seen as a part donation.
If the trust doesn’t have the funds to purchase the farm, the sale can take place on loan account.
Where a trust incurs no interest or interest at a rate lower than the official rate of interest (currently 7.75%) on the loan, an amount equal to the difference between the interest incurred by the trust (if any) and the interest that would have been incurred at the official rate of interest would be treated as a donation made to the trust, thus potentially triggering donations tax.
The outstanding loan account is an asset in the estate and is subject to estate duty. The farmer’s deceased estate will further have a claim against the trust for the outstanding value of the loan.
Generally speaking, a properly constructed trust could ensure that farms remain in the family for years to come. The use and administration of trusts can, however, be complicated. Getting expert advice and guidance is always advisable.
The material is not intended as and does not constitute financial or any other advice. References to the male gender includes the female and vice versa. The material does not take into account your personal financial circumstances. For this reason, it is recommended that you speak to an accredited broker or financial adviser to consider all your options and draw up a plan to achieve your financial goals.
Eugene Mpikwane is a Legal Adviser at Old Mutual.