Doubling of estate duty tax-free abatement will reduce use of trusts

The recent promulgation of an amendment to the Estate Duty Act which will come into force from 1st January 2010 will be yet another step in the process of reducing the artificial use of trusts in estate planning, says Ulrik Strandvik, director of Grant Gunston Attorneys.

The recent change, he said, is particularly important news for those (the majority), the bulk of whose estate is tied up in property.

“Estate Duty is the tax on the value of a person’s estate, which is presently levied at 20%. As the law stands,” said Strandvik, “the estate of the deceased would be entitled to an abatement of R3,5 million on the value of his/her estate and many people make use of a trust to capitalise on this abatement. Any bequest to a surviving spouse would be free of estate duty, but when the surviving spouse has passed away his/her estate would be saddled with the burden of paying the estate duty.”

“Estate planners would, traditionally, therefore, advise the client to bequeath R3,5 million to a trust and the remainder to their spouse. This meant that when the surviving spouse also passed away, the R3,5 million was protected from the 20% estate duty levied on the spouse’s assets.”

The new amendment to the Act essentially doubles the abatement amount available to the spouse (i.e. to R7 million as the law now stands).

“With this amendment,” said Strandvik, “there will be far less incentive for the majority of estate planning professionals to advise clients to create asset holding trusts. This, in turn, will reduce legal costs and simplify the spouse’s position.”

If the deceased has already used a portion of the abatement, the balance left will be available to the surviving spouse. Should there be more than one surviving spouse, the abatement will be apportioned between them. If the surviving spouse inherits estates from more than one deceased spouse, he or she is entitled to choose which abatement will be used.

As yet, says Strandvik, the new law makes no provision for what happens when both spouses die simultaneously, which in his opinion, is an oversight and will have to be addressed by the relevant authorities.

“The perception in the legal and accounting fraternities is that the Receiver of Revenue dislikes the artificial use of trusts. We welcome this latest change because it will work to the individual’s benefit and will simplify a somewhat complicated and artificial procedure.”

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