Categories: How to Business

Section 3(3)(d) – the silent assassin of your estate plan

One of the overarching objectives of estate planning is to minimise estate duty. There are various planning mechanisms which can…

One such mechanism involves transferring ownership of assets to third parties such as trusts.

It is however always a challenging exercise to accommodate a planner’s desire to retain control of their assets and still fulfil the objective of estate savings.

While significant savings may be achieved through estate planning, caution must, however, be exercised since revenue laws such as the Income Tax Act and the Estate Duty Act are laden with minefields of anti-avoidance provisions.

One such provision is found in Section 3(3) (d) of the Estate Duty Act, which will be referred as “this section” throughout the article.

This section includes within the deemed property of a deceased person any property which the deceased, immediately prior to their death, was competent to dispose of for their own benefit or for the benefit of his estate.

READ Should you nominate a beneficiary on a retirement annuity?

Simply put, your estate could be liable for estate duty on the property which did not technically belong to you if you had the power to dispose of that property during your lifetime.

The intention is to ensure that individuals who have endeavoured to limit estate duty on certain property, yet still enjoy the property, are taxed on this property after death.

For this section to apply the deceased must, immediately before their death, have:

  • the power to appropriate or dispose of such property as they saw fit whether exercisable by will, power of appointment or in any other manner;
  • and the power to revoke or vary the provisions of any deed of donation, settlement, trust or other disposition made by them.

Examples include the following:

  • Revocable donations

Planners often use inter-spousal donations to reduce the dutiable value of their estates. Such transactions are attractive because they don’t give rise to donations tax and capital gains tax.

READ Tax: who are the good guys and who are the bad?

If, for example, a husband donates the ownership of a farm to his wife as part of an estate planning exercise, Section 3(3) may be invoked by SARS since the donor may revoke the donation at any time during the marriage.

The husband may be deemed to have the power to appropriate or dispose of the property as he wishes. The full value of the farm may, therefore, be deemed property in his estate.

  • Founder’s influence over trust assets

Where a founder of a trust retains unfettered control over the trust assets, the section may apply to deem those assets property in their estate.

READ How to run a successful family business

Caution should, therefore, be exercised when according a founder the powers to unilaterally appoint trustees or to veto decisions of the trustees.

Provisions in some trust deeds which state that no decisions shall be passed unless the donor is “part of the majority”, could also trigger Section 3(3).

  • No independent trustee

The failure to appoint an independent trustee for a family trust could also result in the section being triggered. Where family members are the sole trustees of a trust, a reasonable impression can be created that the trust is nothing more than the ‘alter-ego’ of the person controlling the trust.

The assets of the trust, then, are for all intents and purposes, therefore, deemed to belong to that person. The appointment of an independent trustee is vital to ensure that this impression is not created.

Section 3(3) is indeed a ‘silent assassin’ with the capacity to derail any estate plan. All estate planning must be done with this provision in mind. The application of Section 3(3) could spell disaster for an estate and the heirs.

Extreme caution must be exercised when drawing up deeds of donations and trust deeds.

Gerald Peter is a Legal Adviser Specialist at Old Mutual Personal Financial Advice in Durban.

Disclaimer

The foregoing does not constitute financial or any other advice, and does not take into account your personal financial circumstances. For this reason, it’s recommended you speak to an accredited broker or financial adviser to consider all your options and draw up a plan to achieve your financial goals.

You can also contact Koos Nel, Head of Old Mutual Agri on knel1@oldmutual.com for further information.

Recent Posts

Latest stats show slight decrease in rhino poaching

The decline in South Africa’s 1 January – 31 August 2018 national rhino poaching statistics to 508 animals, compared to…

8 hours ago

The best fish species for aquaponics

While the Nile tilapia is the fastest grower, it is easier to obtain a permit for the slower-growing Mozambique tilapia.

16 hours ago

Courts order municipalities to adhere to commonage rules

Two recent court rulings on commonages have outlined the rights of those using the areas, as well as the responsibilities…

2 days ago

Learn about beef BLUP basics

Producers use breeding values to determine the long-term value of certain animals to their herds.

2 days ago

Rethinking sustainable development

Growing awareness of the interconnectedness between water, energy and food security is resulting in a more holistic way of measuring…

3 days ago

Taking steak to the next level

Steak can be cooked and served in a variety of ways, but this Asian-inspired marinade can turn even the tastiest…

3 days ago

This website uses cookies.