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To Trust Or Not To Trust – Part 2

setting up a trustIn the previous edition we touched base on the different options you as business owners have available to operate from as well as the implications each has on you as the individual.

From last week’s edition it was also clear that you can only really run your personal affairs in one of two ways:
1. In your personal name, or
2. via a Trust.

Should you choose to run your affairs in your personal name, it is imperative that you have a legal Last Will and Testament in place, as this will ensure the smooth transfer of your assets to your beneficiaries.

What happens if I don’t have a Will?

In the event that you die without a Last Will and Testament, your assets will be transferred to your remaining relatives according to the intestate succession law. In terms of this law the executor of your estate cannot transfer any assets to only certain individuals, but will have to transfer to all qualifying beneficiaries in equal amounts. Having an up to date will in place is the only way to ensure you leave your assets to only those individuals that you so wish.

An already grim picture turns even worse when you have minor children and die without a valid Will. In this instance, your full estate will be transferred to the Guardians Fund. The Guardians Fund is a fund set up by the government and will administer the funds in your estate on behalf of your minor children until they reach age 21.

Why would that be such a bad thing?

  1. Firstly, the value of your estate administered under this fund, will earn an interest rate far less than what it could have earned if administered by a private professional.
  2. Secondly, the funds aren’t readily available to the legal guardians of your children as they would have to via the administrator of your estate apply to the courts for each and every expense they need to incur.
  3. Lastly, when the capital from the estate finally pays out, it will be paid out to the children in their personal names. Inherently not such a bad thing, but exactly the sort of thing we are trying to prohibit from happening by implementing a Trust. When the children receive the payouts in their personal names, it immediately forms part of theirestate and would start to attract deathbed expenses.

If you do not have a Trust set up and own all your assets while you are alive, the least you should do to ease the burden on both your minor children as well as their legal guardians after your death, is have your will provide for the formation of a Testamentary Trust. This will bypass the possible impact of your estate ending up with the Guardians Fund.

 

guardians fund vs testamentary trust

What are deathbed expenses?

Deathbed expenses are typically the costs associated with winding up your estate. They would include:

  1. Estate Duty Tax
  2. Capital Gains Tax (CGT)
  3. Executors Fees

You are in other words taxed twice upon your death (Estate Duty and CGT) and it is payable upon the death of every
generation!

Is there a way of minimizing these expenses?

Running your estate in your personal name would not protect your estate from creditors or minimize any taxes or deathbed expenses. If your assets were however owned by a Trust, your personal estate would be worth very little (all the growth on the assets accumulated in the Trust) and your deathbed expenses would subsequently be very little to none.

We will be going into more detail in the next issue.

Is having a Last Will and Testament enough?

Simply put, no. The problem with having a – even Legal – Will is that your entire estate held in your personal name is
immediately frozen upon your death. To wind up your estate can take several months and in certain instances, even years, bringing with it great practical problems. For one, no one will be able to access any cash for some time placing a possible financial burden on your loved ones at a time when it is the last thing you would have wanted.

Should you have had your assets owned by a Trust, your personal estate would still be frozen but there would be
continuous access to funds and control of all assets held by the Trust.

Next week we’ll have a look at why Trusts are so popular and how they interface with your Last Will and Testament.

 

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