Illustration: Colin Daniel


Historically, people whose estates have been potentially liable for estate duty have been advised to move – often on an interest-free loan account – all paid-up personal assets into their family trusts in order to save on the duty. 

However, if the loan has not been repaid by the time of your death, it will constitute an asset in your estate. In many cases, as a result of transferring depreciating assets into a trust, the loan value included in the estate is much higher than the value of the assets. 

To make matters worse, if the trust is unable to repay the loan, the executor could have the trust liquidated before winding up the estate. This might unnecessarily expose other assets in the trust. 

In an attempt to prevent freezing the value of an estate by moving growth assets into a trust, the South African Revenue Service (Sars) introduced an anti-avoidance provision (section 7C of the Income Tax Act), which became effective on March 1, 2017. In terms of this measure, Sars will, through the introduction of a deemed donation on interest-free loans made to a trust, attack any arrangement that attempts to exclude growth in your personal estate. Effectively, the estate planner has to pay “death taxes” on the potential growth during his or her lifetime. 

The landscape for trusts has changed, and estate owners have to understand that they cannot use trusts in the same way as they did before March 2017.

Estate owners have to be careful about which assets they want to protect in a trust and, apart from sentimental assets, focus on moving into a trust high-growth assets and assets they want to protect from creditors.

Remember that it is not always simply about the tax savings or the additional taxes payable on assets transferred to a trust; it is also about a strategy to protect your assets, and to create continuity and liquidity upon your death. There are other considerations, such as a contingency plan in the event that you suffer from Alzheimer’s disease. 

If possible, estate owners should undertake proactive estate planning and purchase assets directly in a trust before their value increases in the hands of the estate planner.

Should a trust own immovable property? 

For the purposes of estate duty, transferring immovable property into a trust ensures that any growth in the value of the property is contained within the trust, rather than in your personal estate. 

Your assets are also protected from attacks by your creditors and/or the creditors of any companies that you own and for which you have signed sureties. 

Upon your death, your properties outside a trust will be caught up in your frozen estate. Your spouse and dependants and other people will not have access to these assets – the properties themselves or any rental income that they might be generating – until your estate is wound up. This could take many years. 

If your primary residence is registered in your name, it will form part of your estate, and the beneficiaries and the executor will decide what will happen to it. This will be based on what you have stipulated in your will.

If there is insufficient liquidity in your estate, the executor may be forced to sell the property to generate cash to pay estate duty. Holding the property in a trust would eliminate this problem and ensure continuity of income and tenure for the beneficiaries of the trust. 

If you hold your primary residence in your personal name, your death will trigger capital gains tax (CGT) – a deemed disposal – subject to the inter-spousal roll-over provisions, regardless of whether the property is sold or retained by the family.

If the property is held in a trust, death will not trigger CGT, and it can be passed on for generations without triggering CGT. The tax will be payable only upon the actual sale of the property by the trust.

However, you have to take into account that you will lose the R2-million primary residence exclusion for CGT purposes if you sell the property out of the trust, rather than out of your personal name. 

Luckily, the punitive provisions on interest-free loans in terms of section 7C of the Income Tax Act exclude loans related to primary residences. 

The decision to move your primary residence into a trust depends on your individual circumstances. The general rule of thumb is to consider moving any property into a trust only if you plan to hold it for a long time, or if you want to protect it from your creditors.

Should a trust own shares in a company or a member’s interest in a close corporation? 

The main reason to house in a trust shares in a company or a member’s interest in a close corporation should be to protect such assets from creditors. Business owners are often required to sign sureties in their own names, and this may expose the shares or member’s interest to creditors. 

Furthermore, the growth on the shares and the member’s interest may be captured in the trust, thereby avoiding estate duty on such growth.

Since 2005, an inter-vivos trust can own a member’s interest in a close corporation if certain conditions are met. 

Should your life assurance pay out to a trust? 

The main aim of taking out life assurance is to provide liquidity in an estate to pay estate duty, a mortgage bond liability, vehicle finance agreements, taxes and winding up costs, such as executor’s fees. Otherwise, the executor will have to sell assets to pay these costs. However, if most of your assets are held in a trust, this may not be such a problem.

Many South Africans are under the impression that payouts from life policies do not form part of their estates for tax purposes. This is a misconception, because the calculation of estate duty includes both property and deemed property, such as most life policy payouts. Structuring life policies in a trust reduces the estate duty and eliminates the executor’s fees thereon.

If the possibility of a trust-owned policy has not been considered, you need to ask whether your financial adviser has conducted an adequate financial needs analysis.

Even if Sars does manage to enforce stricter tax measures on trusts in the future, these will not undo the benefits of structuring your life assurance in a trust, such as protecting assets and providing liquidity.

What about other valuable assets, such as paintings, furniture and jewellery? 

As a result of the limited tax benefits associated with transferring assets to a trust, the focus has shifted to transferring assets that will outgrow any tax cost, as well as personal assets, such as investment paintings and antique furniture, as well as assets with sentimental value.

Phia van der Spuy is a registered Fiduciary Practitioner of South Africa and the founder of Trusteeze, which specialises in trust administration.