ESTATE PLANNING-recent developments &

perspectivesFPI Eastern Cape regional

CPD session2/6/2010

‘Estate Planning can be described as the accumulation of wealth during your

lifetime, the protection of that wealth against inflation, creditors, unnecessary

taxes and expenses and finally the onward distribution of that wealth to the next &

succeeding generations in accordance with your wishes.’

Tiny Carroll, Glacier by Sanlam in FA news May 09

There’s no time like the present

Part of the business of financial planning, but complex……

More than 40 pieces of legislation & countless court cases

However very rewarding to you & your clients

Most cases a proper Will & financial portfolio will suffice

Estate duty is only 0.1% of govt revenue- not just about ED savings

Too often Trusts are set up without any co-ordinated planning & testators/testatrix’s try to ‘rule from the grave’.

Perspective……

All RSA ‘residents’ are liable to estate duty on worldwide property

Anti- money laundering & tax evasion strategies strengthened:- UBS- Switz: 4400 US client names to Inland Revenue & paid $780 mill. in

admission of guilt fines > 30 ‘tax havens’ negotiating with SARS, NPA & Reserve Bank in particular

targeting Isle of Man, Bermuda, Liberia, Guernsey, Gibraltar, Seychelles & Mauritius

Under G20 pressure, 40 countries open books to foreign tax inspectors e.g. Mauritius where SA’s have invested > R 35 bill.

Importance of offshore Will- foreign language; different laws; local knowledge important. Original Will lodged with local Master- but foreign jurisdictions also need Will & don’t recognise SA Master’s authority.

Perspective……

Bernard Madoff case:

Mrs. Madoff had > $ 70 mill in assets Merrill Lynch article: “poor man’s version of an asset protection strategy” In SA no donations tax between ‘spouses’ widely defined; exclusion of

community of property; therefore protected? (warning- divorce!) However later reports state that Mrs. Madoff was left with $ 2.5 mill (her

assets were ‘frozen’- USA has a sieze now argue later approach) NPA- same approach to Tannenbaum’s assets Same question whether here or abroad- “was the asset intentionally put in a

spouses’ name specifically to avoid creditors?” Richard Fuld (ex CEO of Lehman Bros) sold $ 13 mill property to wife for

$100, 2 months before Lehman filed for bankruptcy. Assets siezed. Tannenbaum ‘Ponzi’ scheme- SA authorities acted swiftly

Perspective…… Fidentia fraud case:

Gave rise to PFA amendments: create “beneficiary funds” under control of FSB, not Master High Court

For death benefits payable to dependents or nominees (major or minor) enjoys protection akin to pension/ provident funds

As alternative to payment to guardian/s; or to Trustee/s nominated by the former member or by adult dependent/nominee or guardian (umbrella or inter vivos or testamentary)

Various choices- imperative you provide appropriate advice Serves as another warning to clients not to die intestate- you surrender

control into the hands of faceless govt officials at Master’s Office! Make sure your clients beneficiaries are protected (e.g. check his/her Trust)

Figures from Sanlam Trust

TESTAMENTARY TRUST

280 000

avg. rand amt

No liquidity

GUARDIANS TRUST

65 000

ESTATE

(28%)

GUARDIANS TRUST(28%)

PROVISION FOR DEPENDENTS

TESTAMENTARY TRUST (28%)

WHY NO WILL?

• Sky News: >60% Brit’s die without a Will.

• SA Master’s offices stats (2007): only 40% of deaths reported had a last will & testament (60% intestate).

• The same!? But many deaths in SA go unreported…

For the financial planner as well…… As a ‘door opener’ & more; access to all family members

Many financial planners/ advisers don’t have Wills or any succession plan

FAIS ‘Fit & Proper’- ‘Operational Ability’ includes a “business continuity plan” ‘Financial soundness’ implies certain liquidity minimums Risk Management Plan “supporting business sustainability”

FSB: 29% of FSP’s visited are sole proprieters & majority haven’t made any plans for their own retirement or the future of the business

- sole prop’s can’t bequeath their FSP license! No keyperson= no income - CC’s or Pty (Ltd’s): the business continues but need a keyperson duly

qualified & approved by FSB otherwise no way can operate.

So, train staff; joint venture; ‘buy & sell’; other plans- speak to Compliance O.

ESTATE DUTY ACT amendments

As proposed in 2009 budget speech:-

Recent changes & proposed changes to Act: Scrapped sec. 3(3)(a)(bis) w.e.f. 1/1/09 which included lump sums

from pension/provident/ RA & preservation funds Inserted sec. 3(2)(i) which EXEMPTS them from ED ‘Portable’ unused portion of sec. 4A abatement between ‘spouses’

clarified in Taxation Laws Amendment Act 2009 W.e.f 1/1/2010 irrespective of when former spouse died Therefore no longer ‘use it or lose it’ approach & couple can have

R 7 mill nett estate & not pay ED. Threatened attack on ‘one year trusts’? (limited interests) withdrawn said

Keith Engel, Director of Tax, National Treasury. “Unintended consequences…” yes, see FISA submission

ESTATE DUTY ACT amendments The total exemption of RA’s (& other retirement funds) adds to the unique

benefits of retirement annuities:• tax- deductible subject to 15% TNPF limit• can even wrap a share or CIS portfolio in an RA; • protected from creditors• no limit on the amounts invested as far as estate duty exemption goes• can terminate if emigrating & take proceeds in cash• no maximum retirement age anymore (was 70)• lump sums payable to estate even where no nominees/ dependents.

‘Portable’ R 3.5 mill abatement (or ‘unused’ part thereof):• Polygamous marriage you split R 3.5 mill equally amongst surviving

spouses• Only the 4A amt that was available to the last spouse to die is

carried over (i.e. R 7 mill maximum)• Original draft Bill required 1st dying to bequeath entire estate to

spouse (not part of new sec. 4)

ESTATE DUTY ACT amendments Why is SARS concerned with ‘one- year wonders’?

• Sec. 5 EDA- a limited interest (eg usufruct) is valued over the life expectancy of the usufructury (holder of the interest) or the term of enjoyment of the interest, whichever is lesser

• When usufructury/ holder of the interest dies their estate pays ED • Can obtain massive ED savings if Will stipulates that limited interest

doesn’t end at holder’s death but continues for a term (e.g. one year) in another’s name

• Treasury originally proposed deleting reference to the term• Limited interests such as usufructs are used for prudent financial

planning, e.g.• - bequest property to spouse, usufruct to Trust (beneficiaries are kids)

terminates when kids are self-supporting;or• - bequest property to minor kids, usufruct to spouse which ceases after

10 years when kids become majors. Treasury didn’t throw baby out with the bathwater.

Residential property ‘tax relief’ ….

Taxations Laws Amendment Act, 2009 (new para 51A, 8th schedule ITA):

RESIDENTIAL property is asset of CC, Company (Pty Ltd), or Trust; On or before 11/02/09 to date of registration of transfer; and 100% of the equity is owned by the resident &/ or their spouse; who Remain in residence from 11/02/09 until is transferred to said person/s; Between 1/1/2010 & 31/12/2011 (to be extended?).

No transfer duty and STC, CGT deferred until new owner disposes of

Don’t have to wind-up or deregister the CC, Company or Trust afterwards

Estate duty neutral as person/s owned the equity in the biz anyway, but..

Enjoy R 1.5 mill exemption for ‘primary residences’ afterwards.

Capital gains tax & loan accounts…saga continues

Bothma Family Trust v C:SARS: bequest of loan account to debtor in 2003 was a taxable gain i.t.o. sec. 12(5) 8th schedule. Not award of cash, but debt.

C:SARS v Brummeria 2007: interest- free loan in return for right of occupation & development capital = taxable benefit for developer

Bothma case not followed by Lacock J, NCDiv in ‘XXX Trust’; D.Davis J says Bothma decision was wrong (see The Financial Planner, June/July 2009 ed.)

SARS issued draft interpretation note 10/2008 that interest- free loans only results in a taxable benefit if recipient gives something in exchange

To avoid any tax, suggest bequeath loan to a 3rd party (eg spouse) or bequeath a cash amount to debtor so can repay loan (use life policy).

DIVORCE ORDERS, maintenance & pension funds Sec. 7 (1) Divorce Act- settlement agreement made Order of Court binding on the

estate/ executor Sec. 7 (2) Divorce Act- maintenance Order ends when payer dies….

Badenhorst case when ‘substance over form’ led to exposure of ‘sham trust’ & 2008 case of Brunette v Brunette & Ano SECLD - joinder of Trustees granted on basis that parties regarded the trust assets as part of their partnership.

Common misconception when interviewing clients- trust must not be alter ego*

Sec. 7(8)(a)(i) Divorce Act- Court Order against Fund or RA or preserver

Pension Fund Amendment Act 11/2007- the benefit deemed to accrue to member on date of divorce thereofore non-member can claim their “share”. Tax paid by non-member if election made on or after 1 March 2009

Benefit accrues at death if not claimed already i.t.o. ‘clean-break approach’

Intestate Succession Act: recognises or should recognise spouses of customary; religious (Hindu & Muslim- including polygamous) marraiges; same- sex & heterosexual permanent relationships, subject to legislative enactments in pipeline (Con Crt) * Article by Prof Geach- same ed. Of Financial Planner

• *Article by Prof. Geach in same ed. of Financial Planner

Other issues Trusts & estate plans: if it’s a sale of an asset to Trust & not a donation

have a sale agreement if it’s a loan not a donation, have a loan agreement

(Do the planning properly)

Non- resident disposes of immovable property (or interest in property holding company) is liable for CGT, purchaser must withold tax at

5% proceeds, then seller applies for tax directive New Companies Act: existing CC’s can convert to company or continue

new sec. 78 allows indemnification by the company i.r.o. directors liabilities owed to the company & 3rd parties- therefore can purchase insurance to cover the risk. ‘Contingent liability’ cover for directors/ members crucial to estate plan.

Other topical issues Foreign investment allowance for SA residents up to R 4 mill.

Death benefits from retirement funds & long-term insurance policies will be remitted to non- resident beneficiaries (including emigrants).

Exempt life policies, e.g. “buy & sell” sec. 3(3)(a)(iA)- if no premium or part thereof was paid by or borne by the deceased.

Exemption not apply where shares are owned by a Trust.

The business of financial planning & estate plans Help clients to give order to their financial affairs

Set goals together

Provide a coherent link between their goals, last wills & testaments, trust & the results of their plan by scenario illustrations (testing the plan)

Contextualise- external legal & regulatory enviroment compliance

Ongoing evaluation together; liquidity; CGT tests

Build loyal clients- sustainable business; holistic advice

Long- term (risk) insurance & savings- fees; executor’s & trustee fees; business structuring; reinvestment of estate proceeds.

David Thomson, CFP®

Legal Adviser

Sanlam Broker Services

Chairperson ISG: Estates & Trusts