Estate Planning. Estate Planning for Financial Planners. 15 things that changed the last 5 years

Transcription

1 Estate Planning Estate Planning for Financial Planners 15 things that changed the last 5 years 1

2 Definition of Estate Planning Meyerowitz The arrangement, management and securement and disposition of a person s estate so that he, his family and other beneficiaries may enjoy and continue to enjoy the maximum from his estate and his assets during his lifetime and after his death, no matter when death may occur. 2

3 Topics Selected Estate Duty Abatement Estate Duty Retirement annuities Capital Gains Tax Loan accounts Variation of Trusts Trust compliance SARS Compliance programme Tax Compliance Search and Seizure Wills Transfer Duty Maintenance Donations Policies and marital regimes Universal Partnerships and spouse Business Financial Planning Income tax Key person and other applications Business Financial Planning Estate Duty 3

4 Estate Duty Abatement Pre January 2010 position Benefit of abatement often lost Post January 2010 position Deduction of R

5 Estate Duty Deduction Post-31 December 2009 position As a result of the 2009 amendment, section 4A(2) provides that when a person was the spouse at the time of death of one or more previously deceased persons, the dutiable amount of the estate of that person must be determined by the deduction from the net value of his or her estate of an amount equal to R3,5 million: multiplied by two; and reduced by the amount deducted under section 4A from the net value of the estate of any one of the previously deceased persons. 5

6 Estate Duty Deduction Where a person and his or her spouse die simultaneously, the person of whom the net value of the estate, determined in accordance with s 4, is the smallest must be deemed for the above purposes to have died immediately prior to his or her spouse. To take advantage of this transferable abatement the executor of the estate of the surviving spouse must submit a copy of a return submitted to the Commissioner for the estate of the previously deceased. 6

7 Example Princess passed away two years after Prince. Prince, on his death bequeathed R to his son and the residue to his spouse, Princess. The gross value of Prince s estate was R Princess s assets when she passed away was R Calculate the estate duty of both the respective estates. Ignore executor s fees. 7

8 Estate of Prince Example Property Deemed Property Assets not part of the liquidation and distribution account Gross value of the estate Allowable deductions Bequest to spouse Net estate Section 4A abatement Dutiable estate Estate duty payable 8

9 Estate of Princess Example Property Inheritance from Prince Own assets Deemed Property Assets not part of the liquidation and distribution account Gross value of the estate Allowable deductions Net estate Section 4A abatement Dutiable estate Estate duty payable

10 Note the following: The estate of Princess is 2 x R less the net estate of R of Prince. Stated differently: 2 x R less the unused portion of the abatement = R It is thus not relevant that the abatement in terms of previous legislation was R or R Definition of spouse 10

11 Comments Trust structures Rationale of legislation Reason may exist to still use a trust 10,5 million Burden of proof s 23 bis 11

12 Estate Duty Retirement Annuities Pre January 2009 position death Post January 2009 position death 12

13 Slide 12 D45 Top of page: New 2012 branding to be inserted onto the top of the page Bottom of page: Maroon banner and wording to be removed Dhevaras, 2012/02/13

14 Comments Consistent assumptions for planning Tax benefits Estate duty lump sums and annuities Capital gains tax Income Tax Taxation of retirement fund lump sums Tax free build up in approved funds Perfect vehicle to transfer retrenchment benefits Income source for dependants as opposed to usufruct. (Sale of property vs RA) 13

15 Slide 13 D44 Top of page: New 2012 branding to be inserted onto the top of the page Bottom of page: Maroon banner and wording to be removed Dhevaras, 2012/02/13

16 Comments Perfect vehicle to transfer retrenchment benefits Income source for dependants similar than trust as opposed to use of usufruct. Age of 70 is no longer a bar. 14

17 Slide 14 D43 Top of page: New 2012 branding to be inserted onto the top of the page Bottom of page: Maroon banner and wording to be removed Dhevaras, 2012/02/13

18 Waiver of Debt Donations to trust Bequest to trusts Collatio Capital Gains Tax Loan Accounts 15

19 Slide 15 D42 Top of page: New 2012 branding to be inserted onto the top of the page Bottom of page: Maroon banner and wording to be removed Dhevaras, 2012/02/13

20 Case law ITC 1793 ITC 1835 Comments by academics 16

21 Solutions Comments Bequeath to spouse or other trust Bequeath residue Drafting of Will Create liquidity in the Trust 17

22 Variation of Trusts Risk profiling of trust may have changed Potgieter v Potgieter (629/2010) [2011] ZASCA 181 Facts of the case Argument of children of deceased founder Arguments of newly appointed capital beneficiaries Decision of the SCA 18

23 Importance of SCA Case for Financial Planning Must my children be part of the trust meeting to educate them? Always leave a door open to amend the deed 19

24 Trust Substance over form? FNB v Britz 20 July 2011 The legal question Could the court pierce the veneer of the trust and order that the assets of the trust can be attached by creditors? What legal and factual circumstances will warrant such a conclusion? 20

25 Arguments by Married Couple 1. As a businessman and being married in community of property, he was advised to re-arrange his business affairs and personal portfolio of assets. 2. He established a trading trust, which was run as a business, and two trusts to house personal assets. 3. He contended that all times he differentiated between the assets of the trust and his personal assets. 4. Rental paid to the trust to occupy the residence were market related and covered the bond payments. 21

26 Arguments by Creditor 1. The married couple are effectively in full control of the trust assets. 2. If not for the trust, the couple would have acquired the assets in their own name. 3. The married couple are the sole trustees in terms of the trust deeds. 4. They have an unfettered discretion to deal with trust assets. 5. They are the ultimate beneficiaries of the trust assets. 6. They had the power to remove and appoint trustees. 7. The couple could at any time, in their absolute discretion, transfer the assets to themselves because they were included as capital beneficiaries in terms of the trust deed. 8. The transactions entered into with the trust were simulated. 22

27 Decision of Court 1. The trusts were not treated as separate existing entities. 2. The trusts are the alter ego of the couple. 3. There was a deliberate attempt to rearrange their financial affairs to evade creditors. 4. The court referred to the Badenhorst and Jordaan cases that held: a. One must have regard to the terms of the trust deed, and b. consider evidence how the affairs of the trust was conducted. 5. The clause that allows successive trustees to be appointed is indicative of placing the control of the affairs of the trust in the hands of the married couple. 6. In terms of the trust deed, the beneficiaries could not challenge the administrative affairs of the trust. It therefore created rights for the beneficiaries, but then does not allow protecting those rights and thus not in accordance with the principle that the trust assets should be administered for the benefit of the beneficiaries. 23

28 Decision of Court continued 7. There was no proof of a lease agreement between the married couple and the trust that houses the property, thus ostensibly use the property as their own. By doing so they also not fulfilling their fiduciary duty towards the beneficiaries of the trust. 8. The court found authority for their decision in corporate law with respect to the abuse of a legal entity which leads to the piercing of the corporate veil. It was held that fraud is not a pre-condition and that a court applies a look through approach. Of importance for the court is that the personality of the trust was abused or misused. 9. On the evidence there was no proper paper trial to determine who really paid the bond. It was unclear whether loan accounts were created or whether donations were made to the trust. 10. There was no evidence that the transfer of movable assets actually took place, because proof for the payment of goods and delivery was absent. 11. On the evidence it was clear that the married couple could not convince the court that the de facto control was relinquished. 24

29 Comments on the Case An interesting aspect is that the court regarded the interest free loan with no specific terms as indicative of control in the specific circumstances. Our law will always pay due regard to the substance of the transaction over the form that a transaction is couched in. To arrive at such a conclusion the court will look at the terms of the trust deed as well as the factual circumstances. 25

30 Comments on the Case To conclude that the trust deed has the power to appoint further trustees, or that an interest-free loan is made to the trust, is not sufficient on its own to regard trust assets as that of an estate planner. All the surrounding circumstances must be taken into consideration to avoid the result of the case discussed. It is strongly suggested: To appoint an independent trustee, although the court did not make much of the fact that the parties were married in community of property and acting as trustees. Be meticulous in the documentation of transactions with and by the trust, always keeping in mind that the object of the trust is for the benefit of the beneficiaries. 26

31 Trust Compliance SARS Compliance Programme 27

32 Trust SARS Compliance Programme Our preliminary sampling exercise has shown that under-declaration of income is an area of concern, where an individual s declared income is not consistent with their asset base. To date, 467 potential wealthy individuals have been identified where there are discrepancies between their asset base and declared income, and they can expect much closer scrutiny from SARS. 28

33 Trust SARS Compliance Programme Wealthy individuals are also generally linked to a number of trusts and companies, some of which are used as vehicles to channel and hide their assets and income. Most of the wealthy South Africans we have reviewed are linked to more than 10 associated companies on average and 87% of these associated companies and 59% of trusts have outstanding returns. A total of 67% of audits conducted into trusts show serious under-reporting. 29

34 Trust SARS Compliance Programme 30

35 Tax Compliance Search and Seizure SARS letter of enquiry or audit Section 74 D Search and Seizure The Rights of Taxpayers 31

36 Wills Interpretation Pienaar v Master of the Free State High Court [2011] ZASCA112 (01 June 2011) The testator (Du Toit) executed a Will in November 2006 (2006 Will) and then later another Will in May 2007 (2007 Will). The deceased was married to Cynthia du Toit but were divorced from her prior to executing both wills mentioned above. The deceased had two daughters born from a previous marriage and a son, Derick born from the marriage between him and Cynthia. 32

37 Summary of the provisions of the 2006 and 2007 Wills 2006 Will Inheritance 2007 Will Inheritance Cynthia Sanlam Investment Cynthia Lifelong use of property Derick Property + Car Derick and daughters Property Residue Daughters One daughter and Derick Car Residue Cash Son-in-law Daughters 33

38 The Supreme Court of Appeal of South Africa held as follows: 1. Referring to case law, as a general rule Wills (in the absence of a revocation clause) of a testator must be read together and the earlier will are deemed to be revoked as far as they are inconsistent with the later one. 2. Both Wills dealt with the entire estate. 3. There was no revocation clause in the 2007 Will. 4. The 2007 Will was in effect a new scheme 5. Relying on Price v The Master 1982 (3) SA 301 (N) it held that if there are two Wills with similar provisions but different in effect, and each Will deal with the entire estate, then they cannot stand together and the later will must be construed as impliedly revoking the earlier. 34

39 6. The golden rule of interpretation is to ascertain the wishes of the testator from the language used in the will. The Appeal Court assumed that the testator knew what the term residue meant. Therefore the Appeal Court concluded that it was the intention of the testator to include the Sanlam Investment policy in the residue of the estate. 7. The order of the High Court (Bloemfontein) was set aside and the Appeal Court concluded that the 2007 Will impliedly revoked the 2006 Will in so far as it was inconsistent with the 2007 will. 35

40 Comments on Case 1. Testators must be certain about their understanding of the meaning of the term residue. Remember that the residue is paid after estate duty is accounted for. Where a direct investment bequest is made which is dutiable, the estate duty will be paid out of the residue of the estate, leaving the residuary heirs less. If the investment is classified as a policy, in other words have a life insured in terms of the investment contract, the proportionate estate duty payable will be collected from the beneficiary. It is therefore crucially important to determine the nature of the investment and whether the estate duty payable on the investment will be collected from the legatee or the residuary heir! 2. A poorly drafted Last Will and Testament can lead to tremendous hardship and may not reflect the true intention of the testator. To avoid litigation and uncertainty, as in this case, it is recommended to have a revocation clause and prepare a new Will that clearly demonstrates the intention of the testator. 36

41 Wills and Estate Duty Planning Assume that you have a scenario where an estate planner wishes to bequeath an amount of R to his spouse and R to his son. The way you choose to describe these bequests in the last will and testament may have an impact on the final estate duty payable and whether the wishes of the testator can be fulfilled. 37

42 Assume that the estate planner presents you with the following assets and liabilities of his estate. Fixed property Cash Life policy payable to the estate Total liabilities of the estate Total estate liabilities such as executors fees, etc

43 The estate planner may choose to bequeath an amount of R to his spouse and the residue to his son. It is his intention that the son must also receive an amount of R Alternatively, the estate planner may choose to bequeath an amount of R to his son and the residue to his spouse. In the first scenario, the son will not receive R as planned by the estate planner. In the latter instance you will note that an estate duty saving of R can be achieved with the result that both heirs will receive more. 39

44 Scenario 1 Bequeath R to his Spouse and residue to Son Property Fixed property Cash Deemed property Policies payable to estate Total Liabilities of estate Estate liabilities Direct bequest to spouse Net estate Abatement Dutiable estate Estate duty payable

45 Calculate residue of Son Total assets Less Liabilities of estate Estate liabilities Bequest to spouse Residue After estate duty

46 Scenario 2 Bequeath R to the Son and the residue to his Spouse Property Fixed property Cash Deemed property Policies payable to estate Total Liabilities of estate Estate liabilities Bequeath residue to spouse Net estate Abatement Dutiable estate Estate duty payable

47 Calculate the Residue that the Spouse receives Calculate residue Total assets Less Liabilities of estate Estate liabilities Bequest to son Residue After estate duty

48 Comment From the above calculation we can now conclude that the son will indeed receive R The total estate duty payable is also reduced to R Therefore, bequeathing the residue of the estate to the spouse will ensure that an additional R as a result of the estate duty savings is available for distribution. Also, the son receives R and not only R

49 Transfer Duty SARS Transfer Duty Handbook 45

50 Maintenance of Surviving Spouses Act The Maintenance of Surviving Spouses Act determines that in certain circumstances, the surviving spouse holds a claim for maintenance against the estate of the deceased spouse. Section 2(1) of the Act determines that if the marriage is dissolved by death after the commencement of the Act, the surviving spouse has a claim against the estate of the deceased spouse for the provision of his reasonable maintenance needs until his death or remarriage in so far as he is unable to provide therefore from his own means or earnings. The claim arises regardless of the matrimonial property system which operated in the marriage. However, the claim arises only in so far as the surviving spouse is unable to provide for her reasonable maintenance needs from his own means and earnings. The surviving spouse shall not, however, have a right of recourse against any person to whom money or property has already been paid. 46

51 Maintenance of Surviving Spouses Act The following factors must be taken into account in considering the surviving spouse s reasonable maintenance needs: The amount in the deceased estate available for distribution amongst heirs and legatees. The existing and expected means, earning capacity, financial needs and obligations of the surviving spouse and the subsistence of the marriage. The standard of living of the surviving spouse during the subsistence of the marriage and his age on the death of the deceased spouse. The duration of the marriage The surviving spouse s age at the time of the deceased s death Any other relevant factor. 47

52 Maintenance Claims against Deceased Estates Situation where the Spouses are not Divorced Maintenance of Surviving Spouses Act 27 of Section 2(1) If a marriage is dissolved by death the survivor shall have a claim against the estate of the deceased person for reasonable maintenance until his death or remarriage in so far as the surviving spouse cannot provide from his/her own means and earnings. Section 2(3)(b) The spouse shall have the same order of preference as a claim for maintenance of a dependent child of the deceased spouse, and if these claims compete the claims shall be reduced proportionately. Section 2(3)(d) The executor of the deceased estate may enter into an agreement with the survivor and the heirs, which includes the creation of the trust in settlement of the claim of the survivor. 48

53 Section 3 Factors Certain factors can be taken into consideration to establish the reasonable maintenance, namely: 1. The amount in the estate available for distribution to the heirs 2. The existing and expected means, incapacity, financial needs and obligations of the survivor and the subsistence of the marriage 3. The standard of living of the survivor giving the subsistence of the marriage and his age at the death of the deceased spouse 49

54 Oshry NO and another v Feldman [2011] 1 All SA 124 (SCA) F & O married late in life, both second marriages. O died leaving F with insufficient means in his will. F claimed under MSSA. The High Court found that payment had to be regular payments and cannot be lump sum. On appeal SCA found that court a quo erred and that maintenance can be lump sum in terms of the 1998 Maintenance Act. A claim against the deceased estate for maintenance is deductible for estate duty purposes, provided that it is reasonable. 50

55 Situation where a Person dies after a Divorce The Divorce Act is relevant and not the Maintenance of Surviving Spouses Act. Kruger NO v Goss and another [2010] 1 All SA 422 (SCA) This case dealt with rehabilitative maintenance, which is usually for a limited period of the date of divorce. Maintenance does not extend beyond death of maintenance payer unless divorce order states that. Of course a spouse is free to agree to bind his/her estate to pay maintenance after death. That is not what occurred in the present case. To allow maintenance claims of the kind encountered here against deceased estates might have all sorts of undesirable consequences. 51

56 Donations Welch Case Discussion The facts of the case were briefly (simplified) the following: The husband divorced his spouse in In order to provide for rehabilitative maintenance for the divorced spouse and maintenance for the children he agreed to make approximately R available to the trust. This was made an order of court. The capital and income beneficiaries were the spouse and the children. Only the children were the capital beneficiaries. SARS argued that the settlement of assets to a trust was a gratuitous disposal of property in terms of section 55 of the Income Tax Act, that is the section that deals with donations tax. 52

57 Ratio The Supreme Court thus held that section 55 of the Income Tax Act is not applicable if a quid pro quo (mutual consideration, something for something. Afrikaans teenprestasie) was given. The Supreme Court held that section 55 of the Income Tax Act requires that the disposition of the asset must be out of pure liberality or disinterested benevolence. Also, section 55 did not alter the common law, which requires that a disposition must be out of pure liberality or disinterested benevolence before it can be said that it was a donation. 53

58 Ratio continue In this case the husband was under the legal obligation to pay maintenance and it was a debt due that did not cease upon death. The trust was a mechanism which the parties decided to use to discharge the maintenance obligation. The court noted that the divorced spouse also gave a quid pro quo. She abandoned her maintenance claim against the husband and agreed to look at the trust for maintenance. It was therefore held that no donations tax was payable. 54

59 Comments on the Importance of this Case for Financial Planners SARS could have invoked section 58 of the Income Tax Act to claim donations tax for the amount that was more than the legal maintenance obligation. Therefore, if a similar set of facts represent itself it may be prudent to base one s planning on the basis that SARS will the next time around invoke section 58 of the Income Tax Act. Therefore, it becomes important to calculate the exact amount that relates to the maintenance obligation so to avoid donations tax as contemplated by section

60 Comments on Case In a divorce case it is foreseeable that the parties will make some calculations based on some methodology. The application of the correct methodology is of paramount importance. To start off with an estimated capital lump sum does not make sense. It is submitted that the point of departure in any such negotiation in a divorce matter will be to make an estimate of what the amount is needed per month, for how long, and the assumptions in respect of the investments return as well as the inflation rate. It is submitted that it is easier to accurately determine the monthly expenditure needed than an estimated capital lump sum. 56

61 Benefits The capital amount is protected Avoid conflict between capital and income beneficiaries Effective income tax and capital gains tax splitting can be achieved. 57

62 Policies and Marital Regimes Accrual Principle of stipulatio alteri Law of contract right to claim + suspensive time clause Hersov property = right in respect of estate duty 58

63 Policies and Marital Regimes Community of Property Hees NO v Southern Life Payable to estate falls into joint estate 59

64 Universal Partnerships and Spouse Butters v Mncora (181/2011) [2012] ZASCA 29 (28 March 2012) 60

65 The Facts of the Case Mr Butters (B) and Ms Mncora (M) lived together for 20 years as husband and wife, but were not married in terms of the laws of the Republic of South Africa. However, the evidence shows that they were engaged. B started a security business whilst M worked as a secretary with a salary of R2 000 per month. M, on the insistence of B, stayed at home to look after the children. B provided for all the maintenance needs of the family. B accumulated many assets, all registered in his name. The relationship came to an end and a dispute ensued as to whether she was entitled to any of the assets, even though she was not married to B. M contended that it was her understanding that they shared everything, whist B argued that everything was his and his alone since she played no part in his business life. M made no direct contribution to B s business, but supported him, care for him and their children, whilst also maintaining their common home. 61

66 The Legal Question Can a universal partnership exist between parties in a cohabitation relationship? Is it a requirement that M must have made a contribution to the commercial entity or is it sufficed that she contributed to the maintenance of the family? If such a partnership is recognized in our law, can it be said on the evidence presented that M will succeed in a claim against B? 62

67 Decision of the Supreme Court of Appeal (SCA) The general rule in our law is that cohabitation does not give rise to special legal consequences. Protective measures in terms of family law are not available to unmarried couples, but the remedies of private law may provide relief. To succeed in a claim the law of partnership must apply to the facts of the case. The essential elements of a partnership in our law are: Each of the parties must bring something into the partnership whether it may be money or labour or skill. The partnership must be carried on for the joint benefit of both parties. The object must be to make a profit. The SCA dealt with all the requirements. B argued that M made no contribution to the commercial undertaking (the business) and therefore the first requirement is not fulfilled. 63

68 Roman and Roman Dutch law recognized universal partnerships, apart from particular partnerships entered into for the purposes of a particular enterprise. A distinction in respect of universal partnerships must be made where parties agree to put in common all their property, present and in future, and the situation where the parties agree that all they may acquire during the existence of the partnership from every kind of commercial undertaking shall be partnership property. The SCA held that a partnership enterprise may extend beyond commercial undertakings and therefore the contributions of both parties need not be confined to a profit making entity. The SCA accepted the evidence that the partnership between the parties could include both the commercial undertaking (business) and the non profit part of their family life. The contribution of M cannot be denied. 64

69 M fulfilled the first qualification and the fact that she did not make a direct contribution to the commercial undertaking does not debar her from fulfilling this requirement. The second and third requirement that the partnership must be for the joint benefit of parties and make a profit is also fulfilled since they entered into a partnership which encompassed both their family life and the business conducted by B. The non financial contribution of M is a relevant factor since it is established that the contribution to the commercial enterprise is not the only requirement for bringing something into the partnership, albeit by conduct and not an express partnership agreement. B shared in the benefits derived from the contribution. Thus, the contributions of both parties, financial or otherwise, was shared and consumed in the pursuit of their common enterprise. 65

70 Held by SCA M succeeded in her argument that a tacit universal partnership between her and B existed and therefore the appeal of B fails. 66

71 Comments on the Case The minority judgement did not disagree with the exposition of the law by the majority, discussed above. The minority decided that the appeal should succeed based on the evidence led in terms of the tacit agreement between the parties. The importance hereof is that any party that finds him or her in a similar position should ensure that concrete evidence is placed before the court that there was indeed an express intention that a contract came into being. In such an instance, our law is now clear that legal recognition and remedies are available for a person in a cohabitation relationship. 67

72 Comments on the Case For purposes of taxation, persons living together are treated as a spouse, as defined. The spouse s deduction for estate duty and rollover for capital gains tax relief will be available. The same applies to donations made between spouses, as defined. 68

73 Comments on the Case The Domestic Partnership Bill in not yet written into law in South Africa and persons staying together in an unregulated relationship should draw up a cohabitation agreement that stipulates some of the following: 1. Distribution of assets upon termination of the relationship 2. Maintenance obligations towards each other 3. Education and welfare of children 4. Future payment of insurance policies and ownership of the policy on the life of a breadwinner 5. Establishing a trust for dependants 6. The right to reside in the family home after termination of the relationship. This aspect must be in writing and signed by both parties to have legal effect since it relates to immovable property. 69

74 Business Financial Planning Business financial planning is essentially no different than personal financial planning. It also deals with the creation and protection of wealth. The only difference is that we deal with employer owned policies as well as individual owned policies. Where in personal financial planning the owner and life assured is usually the same person, this is often not true for business financial planning. For instance, a company will insure the life of an employee or a business partner will insure the life of the other business partners. It is therefore important to have a good understanding of the concept that one person can be the owner of life insurance and someone else the life assured. 70

75 Business Financial Planning and Key Person Policies The proceeds of a genuine key person policy will assist the business to survive losses and to meet expenditure to recruit and train a new employee. Stated differently, the purpose of the policy is to cover the business against operating losses. Section 11(w) deduction objective and subjective criteria Proceeds in Gross income, but may qualify for an exemption What about repayment of loan accounts and surety ship plans? 71

76 Key Person Policies Estate Duty The first requirement is that the Commissioner must be satisfied that all the requirements are adhered to. SARS provides guidelines how he will exercise his discretion. What follow is the views of SARS in terms of a reference guide published in To enable SARS (on behalf of the Commissioner) to consider whether the proceeds of a policy fall within the ambit of the exclusion, all the relevant documentation pertaining to the case, namely copies of the resolution taken by company to take out such policy, and application made for the policy and any other documentation to prove that the proceeds of the policy were not applied to benefit either the estate, any relative of the deceased or any person who was dependent upon the deceased for his/her maintenance or a family company of the deceased as envisaged in the relevant section of the Act. These documents must be submitted together with the Liquidation and Distribution Account to the Master s Office where the SARS estate auditor will verify the documentation. 72