The importance of estate planning

No one can disagree that a lack of proper estate planning could result in major reversals for a family business.

Peter O’Halloran - Tax advice

Proper estate planning ensures that the succession of heirs to the family business and assets causes minimal friction and cost.

The surviving spouse and dependants will be left with sufficient funds to carry them through to death or self-sufficiency, while the fallout that would otherwise accompany a major business reversal (the death of the owner) is contained as far as possible.

Proper estate planning also benefits you in your own lifetime, enabling you to retire with health problems, and their accompanying costs, and other aspects planned for.

To avoid triggering adverse tax consequences, an estate planner should have a sound understanding of the tax and value added tax implications, as well as the capital gains tax effect of any suggested changes of ownership.

The movement of assets out of the planner’s hands is often a key consideration in any estate plan. In 2017, for example, the rules regarding sales of assets to trusts and companies changed, and loan accounts might now attract income tax.

This has to be taken into account so that cash flow is not affected and taxation costs do not increase disproportionately.

This said, the use of trusts for asset protection and for the benefit of youthful or inexperienced family members is still a good solution. But proper trust administration and tax reporting are crucial.

The tools of estate planning remain the will, testamentary and inter-vivos trusts,
companies, antenuptial contracts, loan accounts and shareholders’ agreements, life
assurance, and retirement and health plans.

With many South Africans operating in more than one jurisdiction, new
opportunities and risks present themselves.

For example, SARS plans to tax the offshore earnings of South Africans who leave their families behind for extended periods to seek gainful employment elsewhere, and this will have to be reckoned with.

But different jurisdictions might have better planning opportunities than are available in South Africa, and South Africans who venture offshore can add offshore trusts, companies and partnerships and other forms of corporate structures to the list of planning tools.

They might also be able to use double tax agreements between South Africa and
the country of operations to their advantage.

At the same time, however, they should plan for problems in the offshore jurisdiction.

In a follow-up series of articles, the tax consequences of trusts and offshore companies
will be discussed in more detail.

Advocate Peter O’Halloran is a tax specialist.