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.
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:
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.
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.
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.
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 [email protected] for further information.