HOW TRUSTS ARE USED TO REDUCE ESTATE DUTY

HOW TRUSTS ARE USED TO REDUCE ESTATE DUTY

Most inter vivos trusts are established when the founder of the trust places an asset in the trust by “selling” the asset to the trust and granting the trust an interest-free loan. Inter vivos trusts are established by a living founder, while testamentary trusts come into being after death by way of a will. The reason for selling the asset to the trust using an interest-free or low-interest loan, rather than donating it, is to avoid donations tax. Donations tax is levied a 20% on the donation that exceeds R100 000. By granting the trust an interest-free loan, the value of the asset is pledged at the loan value in the founder’s estate. Only the loan, which does not grow in value, remains in the founder’s estate. This can result in lower estate duty being payable on the founders death, and the loan can be reduced each year by the founder making a R100 000 tax-free donation to the trust.

Reference: Laura du Preez