Herewith short summary of changes impacting on Retirement Funding:
Contributions to retirement funds:
Contributions by employers to pension, provident and retirement annuity funds are not currently taxed in the hands of employees. From March1, 2012, these contributions will be deemed to be a taxable fringe benefit in the hands of the employee
Individuals will be allowed to deduct up to 22.5% of their taxable income for contributions to pension, provident and retirement annuity funds, subject to a maximum deduction of R200000 and a minimum of R12000. This is a slight change from the existing legislation where a distinction is drawn between retirement funding income and non-retirement funding income.
The taxation of employer contributions in the hands of employees will have a significant impact on the investment savings of retirement fund members. The tax deduction regime of 7.5% of approved remuneration for pension contributions and up to 15% of non-retirement funding income will no longer be applicable from 1 March 2012, and it is anticipated that the application of a total of 22.5% of taxable income (as opposed to approved remuneration or non-retirement funding income) for all retirement contributions means that the percentage deduction will be applicable off a smaller base).
The minimum deduction is potentially beneficial for low paid workers as this allows them to benefit from the floor level tax deduction. The R200000 cap on deductions makes sense from the government’s perspective as beyond a certain savings level it is clear that an individual will not be dependent on the state in old age.
Effective removal of provident funds
Withdrawal at retirement from provident funds will be limited to one third of the accumulated share of fund. On balance this is probably a good move as it will reduce the possibility of individuals squandering their retirement benefits. It appears that legacy provident funds will be accommodated, so members should not attempt to cash in their provident funds as their rights will be protected.
Taxation of lump sum benefits on retirement
Government will increase the tax-free lump sum on retirement from R300000 to R315000.
Thursday, February 24, 2011
Monday, February 14, 2011
10 reasons to invest in a retirement annuity (RA)
Retirement annuities remain a popular investment
vehicle with many South Africans for good reason.
A retirement annuity is a long-term savings vehicle aimed
primarily at people providing for their retirement. To prevent
people from relying on the government to provide for them in
their old age, there are legal restrictions on withdrawing funds
from RAs. But there are also tax advantages to offset the lack
of access to funds. Tax benefits are just one of the ten reasons
that you should consider a retirement annuity:
1. Preparing for retirement
An RA helps you to build up capital during your working years so that you have enough income to enjoy the same standard of living when you retire.
2. Ensuring sufficient savings
The rule of thumb is that if you save 15% of your salary over 35 years, you will receive 75% of your salary as a pension, given reasonable returns.
The problem is that your pensionable salary (the amount that your 15% pension contributions are calculated on) is usually about only 70% of your total salary benefits which include, for example, a bonus, car allowance, medical aid and other benefits. This means that you could retire on 75% of
70% of your salary! It is important to save for these ‘extras’ as they do help us meet our current living expenses.
For example: if your monthly package is R20 000, you would need to retire on the equivalent of R15 000 (75%). But your pensionable salary is significantly less at R10 500 (75% X R20 000 X 70%). By investing 15% of your non-pensionable income into a retirement annuity, you can make up the savings gap. A starting point is to always invest 15% of your bonus tax-free into an RA.
3. Tax benefits
You can invest up to 15% of your total income (less any amount that may be used for other pension fund contributions) tax-free. Not only can you invest with before-tax money, but you do not have to pay capital gains tax or income tax on your retirement investment. Your investment growth will be higher over the long-term as the growth remains in the policy and
will usually offer you a better after-tax return than other types of saving. When you retire, you can take one-third of your investment as a lump sum. Of this the first R300 000 is tax-free with a favourable tax-rate for higher amounts. The remaining two-thirds of the retirement annuity is invested in an annuity to provide you with income during your retirement. You can reduce your income tax by contributing towards an RA before the end of the tax year in February.
4. The power of compound growth
Because you are saving over a long period, your money starts to work for you as you earn interest on the interest. If you save consistently over 30 years, less than 35 cents of each Rand of income you receive will come from the contribution you paid in. The balance will come from the growth
earned on your contributions and savings in retirement.
5. Disciplined savings
You do not have access to your retirement annuity savings until the age of 55. This may sound like a disadvantage but it removes the temptation to dip into or deplete your savings while you are working. A 25-year old needs about 15% of his/her salary through their working lifetime to secure an adequate pension. If they cashed in their savings at 35, they would need to save 25% to get to the same benefit. Starting from a zero base at 45 requires an incredible 47%! The only remedy here would be to retire later.
6. Long-term growth
As markets fluctuate during different economic cycles, your consistent contributions will average out this variability. You also draw your pension over a (hopefully) prolonged period. Therefore, what happens in a turbulent investment market is of less concern to you. The average investment manager has delivered returns which are 11% above inflation over the last 5 years, despite the recent global economic crisis.
7. Supporting your dependants
If your dependents are left to cope without you, your retirement annuity can provide a source of income for those you leave behind, especially if you buy death cover on your policy. The cash benefit from a retirement annuity falls outside your estate, so if you die and are insolvent, your
benefit is paid to your family rather than your creditors.
8. Room to grow your savings
While pension funds generally require a contribution that is a fixed percentage of your salary, RAs offer more flexibility. Many people recognise the need to save but struggle in the short term to meet
financial obligations. A retirement annuity allows you to slowly increase your contributions over time. For example, you could take 3% from each of your next five years’ salary increases to get to the full 15% contribution.
You can also invest a portion of your bonus each year as a lump sum contribution.
9. Diversified portfolio
You have access to different asset classes in a retirement annuity. You can invest 25% of your savings offshore without needing Reserve Bank clearance. You can also invest in other types of
portfolios through your RA, such as direct property, private equity and fund of funds.
10. Freedom of choice
With many retirement annuities, you can choose your underlying investment giving you some flexibility in how your contributions are invested and therefore how they grow.
*Article from Liberty*
vehicle with many South Africans for good reason.
A retirement annuity is a long-term savings vehicle aimed
primarily at people providing for their retirement. To prevent
people from relying on the government to provide for them in
their old age, there are legal restrictions on withdrawing funds
from RAs. But there are also tax advantages to offset the lack
of access to funds. Tax benefits are just one of the ten reasons
that you should consider a retirement annuity:
1. Preparing for retirement
An RA helps you to build up capital during your working years so that you have enough income to enjoy the same standard of living when you retire.
2. Ensuring sufficient savings
The rule of thumb is that if you save 15% of your salary over 35 years, you will receive 75% of your salary as a pension, given reasonable returns.
The problem is that your pensionable salary (the amount that your 15% pension contributions are calculated on) is usually about only 70% of your total salary benefits which include, for example, a bonus, car allowance, medical aid and other benefits. This means that you could retire on 75% of
70% of your salary! It is important to save for these ‘extras’ as they do help us meet our current living expenses.
For example: if your monthly package is R20 000, you would need to retire on the equivalent of R15 000 (75%). But your pensionable salary is significantly less at R10 500 (75% X R20 000 X 70%). By investing 15% of your non-pensionable income into a retirement annuity, you can make up the savings gap. A starting point is to always invest 15% of your bonus tax-free into an RA.
3. Tax benefits
You can invest up to 15% of your total income (less any amount that may be used for other pension fund contributions) tax-free. Not only can you invest with before-tax money, but you do not have to pay capital gains tax or income tax on your retirement investment. Your investment growth will be higher over the long-term as the growth remains in the policy and
will usually offer you a better after-tax return than other types of saving. When you retire, you can take one-third of your investment as a lump sum. Of this the first R300 000 is tax-free with a favourable tax-rate for higher amounts. The remaining two-thirds of the retirement annuity is invested in an annuity to provide you with income during your retirement. You can reduce your income tax by contributing towards an RA before the end of the tax year in February.
4. The power of compound growth
Because you are saving over a long period, your money starts to work for you as you earn interest on the interest. If you save consistently over 30 years, less than 35 cents of each Rand of income you receive will come from the contribution you paid in. The balance will come from the growth
earned on your contributions and savings in retirement.
5. Disciplined savings
You do not have access to your retirement annuity savings until the age of 55. This may sound like a disadvantage but it removes the temptation to dip into or deplete your savings while you are working. A 25-year old needs about 15% of his/her salary through their working lifetime to secure an adequate pension. If they cashed in their savings at 35, they would need to save 25% to get to the same benefit. Starting from a zero base at 45 requires an incredible 47%! The only remedy here would be to retire later.
6. Long-term growth
As markets fluctuate during different economic cycles, your consistent contributions will average out this variability. You also draw your pension over a (hopefully) prolonged period. Therefore, what happens in a turbulent investment market is of less concern to you. The average investment manager has delivered returns which are 11% above inflation over the last 5 years, despite the recent global economic crisis.
7. Supporting your dependants
If your dependents are left to cope without you, your retirement annuity can provide a source of income for those you leave behind, especially if you buy death cover on your policy. The cash benefit from a retirement annuity falls outside your estate, so if you die and are insolvent, your
benefit is paid to your family rather than your creditors.
8. Room to grow your savings
While pension funds generally require a contribution that is a fixed percentage of your salary, RAs offer more flexibility. Many people recognise the need to save but struggle in the short term to meet
financial obligations. A retirement annuity allows you to slowly increase your contributions over time. For example, you could take 3% from each of your next five years’ salary increases to get to the full 15% contribution.
You can also invest a portion of your bonus each year as a lump sum contribution.
9. Diversified portfolio
You have access to different asset classes in a retirement annuity. You can invest 25% of your savings offshore without needing Reserve Bank clearance. You can also invest in other types of
portfolios through your RA, such as direct property, private equity and fund of funds.
10. Freedom of choice
With many retirement annuities, you can choose your underlying investment giving you some flexibility in how your contributions are invested and therefore how they grow.
*Article from Liberty*
Tuesday, February 8, 2011
Calculating tax relief
Many ordinary salary-earning taxpayers are aware that there are certain expenses on which one can claim tax relief, but often they have difficulty in working out what portion they can claim tax relief thereon.
16 January 2011 | Steven Jones
Many ordinary salary-earning taxpayers are aware that there are certain expenses on which one can claim tax relief, but often they have difficulty in working out what portion they can claim tax relief thereon.
But help is at hand, as we discuss some of the more common deductions one can claim.
Pension fund contributions, Next to capital gains tax, one of the most confusing tax concepts for most people is that of “retirement-funding employment” (RFE) income. This is the measure used to calculate the deduction allowed for pension fund contributions.
But in actual fact, it is quite simple. Go to your HR department and ask them what portion of your income is taken into account when determining your contributions to the pension fund. This will be determined by the rules of the fund, and varies – for some it may be a percentage of total package, while for others it may be based on basic salary only (ie, excluding allowances). Overtime payments are normally excluded.
Once you have this figure, multiply it by 7,5%. The result is the amount that SARS will allow as a deduction. Obviously, if your actual contribution is less than this amount, SARS will only allow the amount actually contributed. However, if your contribution is more than the 7,5%, the portion disallowed will eventually form part of the tax-free portion of your pension fund when you retire.
Provident fund contributions Unlike pension funds, employee contributions to a provident fund are not tax-deductible. However, the portion of your income that is taken into account for calculating the contributions is still regarded as RFE income, which has an impact when calculating the allowable amount deductible for retirement annuity fund contributions.
Since employer contributions are tax-deductible in the hands of the employer, and do not constitute a fringe benefit in the hands of the employer, most provident funds tend to be structured as “non-contributory” funds (ie, funds where the employee does not make any direct contributions thereto).
Retirement annuity (RA) fund contributions
The reason why the distinction between RFE income and non-RFE income is so important is because the amount allowable as a tax deduction in respect of RA fund contributions is 15% of non-RFE.
In other words, you can contribute to an RA fund up to 15% of any income that is not taken into account when determining contributions to a pension or provident fund. The deduction also applies to any taxable income not derived from employment, such as annuity payments or rental income. This also means if you are not a member of any such fund, you can contribute up to 15% of your total income (from whatever source) to an RA fund and claim tax relief thereon.
However, if 15% of your income from non-RFE employment is less than R1 500 per annum (or R3 500 less pension contributions), you can claim whichever is the greater amount. Once again, any RA fund contribution for which tax relief is not granted is carried over to future years, and if there is any remaining portion thereof by the time you retire, such portion forms part of the tax-free portion of your eventual payout.
Medical fund contributions
SARS allows a fixed monthly amount upon which tax relief will be granted (known as the “cap”). The amounts are R670 per month each for the primary member and first additional beneficiary, and R410 per month for each beneficiary thereafter. For a married member with a spouse and two children, this makes the monthly deductible amount R2 160.
The cap applies whether the contributions are made by the employer or the employee. If the employer contribution exceeds the monthly cap, any excess will be taxed as a fringe benefit, whereas if the employer contribution does not exceed the cap, relief up to the amount of the unused portion will be granted on employee contributions.
However, if you are over the age of 65 years the cap does not apply. This means that there is no fringe benefit on any employer contribution to a medical scheme, irrespective of the amount, while employee contributions are fully tax-deductible.
Entertainment allowances
These were scrapped some years ago, so the amount deductible by ordinary salary-earners in respect of entertainment expenses is a nice round number – zero!
Other expenses
If an employee is required to incur expenses for business purposes as part of their job requirements, such as subsistence, travel, maintenance of a home office, and the like, there must be (a) specific stipulations in the employment contract that this is required, and (b) a specific allowance provided for this purpose.
Different rules apply to each allowance, including the portion of the allowance that is taxed upfront – 80% of travel allowances are taxed upfront; some (such as for uniforms) are not taxed at all; while most other allowances are fully-taxed upfront. Likewise, there are specific ways in which claims against such allowances are made.
– steven@moneywebtax.co.za
16 January 2011 | Steven Jones
Many ordinary salary-earning taxpayers are aware that there are certain expenses on which one can claim tax relief, but often they have difficulty in working out what portion they can claim tax relief thereon.
But help is at hand, as we discuss some of the more common deductions one can claim.
Pension fund contributions, Next to capital gains tax, one of the most confusing tax concepts for most people is that of “retirement-funding employment” (RFE) income. This is the measure used to calculate the deduction allowed for pension fund contributions.
But in actual fact, it is quite simple. Go to your HR department and ask them what portion of your income is taken into account when determining your contributions to the pension fund. This will be determined by the rules of the fund, and varies – for some it may be a percentage of total package, while for others it may be based on basic salary only (ie, excluding allowances). Overtime payments are normally excluded.
Once you have this figure, multiply it by 7,5%. The result is the amount that SARS will allow as a deduction. Obviously, if your actual contribution is less than this amount, SARS will only allow the amount actually contributed. However, if your contribution is more than the 7,5%, the portion disallowed will eventually form part of the tax-free portion of your pension fund when you retire.
Provident fund contributions Unlike pension funds, employee contributions to a provident fund are not tax-deductible. However, the portion of your income that is taken into account for calculating the contributions is still regarded as RFE income, which has an impact when calculating the allowable amount deductible for retirement annuity fund contributions.
Since employer contributions are tax-deductible in the hands of the employer, and do not constitute a fringe benefit in the hands of the employer, most provident funds tend to be structured as “non-contributory” funds (ie, funds where the employee does not make any direct contributions thereto).
Retirement annuity (RA) fund contributions
The reason why the distinction between RFE income and non-RFE income is so important is because the amount allowable as a tax deduction in respect of RA fund contributions is 15% of non-RFE.
In other words, you can contribute to an RA fund up to 15% of any income that is not taken into account when determining contributions to a pension or provident fund. The deduction also applies to any taxable income not derived from employment, such as annuity payments or rental income. This also means if you are not a member of any such fund, you can contribute up to 15% of your total income (from whatever source) to an RA fund and claim tax relief thereon.
However, if 15% of your income from non-RFE employment is less than R1 500 per annum (or R3 500 less pension contributions), you can claim whichever is the greater amount. Once again, any RA fund contribution for which tax relief is not granted is carried over to future years, and if there is any remaining portion thereof by the time you retire, such portion forms part of the tax-free portion of your eventual payout.
Medical fund contributions
SARS allows a fixed monthly amount upon which tax relief will be granted (known as the “cap”). The amounts are R670 per month each for the primary member and first additional beneficiary, and R410 per month for each beneficiary thereafter. For a married member with a spouse and two children, this makes the monthly deductible amount R2 160.
The cap applies whether the contributions are made by the employer or the employee. If the employer contribution exceeds the monthly cap, any excess will be taxed as a fringe benefit, whereas if the employer contribution does not exceed the cap, relief up to the amount of the unused portion will be granted on employee contributions.
However, if you are over the age of 65 years the cap does not apply. This means that there is no fringe benefit on any employer contribution to a medical scheme, irrespective of the amount, while employee contributions are fully tax-deductible.
Entertainment allowances
These were scrapped some years ago, so the amount deductible by ordinary salary-earners in respect of entertainment expenses is a nice round number – zero!
Other expenses
If an employee is required to incur expenses for business purposes as part of their job requirements, such as subsistence, travel, maintenance of a home office, and the like, there must be (a) specific stipulations in the employment contract that this is required, and (b) a specific allowance provided for this purpose.
Different rules apply to each allowance, including the portion of the allowance that is taxed upfront – 80% of travel allowances are taxed upfront; some (such as for uniforms) are not taxed at all; while most other allowances are fully-taxed upfront. Likewise, there are specific ways in which claims against such allowances are made.
– steven@moneywebtax.co.za
Wednesday, February 2, 2011
How prescribed minimum benefits help you manage diabetes
What is diabetes mellitus?
When we eat, the food is broken down into materials that our bodies need to function properly. One of the substances into which food is broken down is the simple sugar glucose. Sugar is absorbed into the bloodstream and stimulates the pancreas to produce insulin. Insulin allows sugar to move from the blood into the cells where it is converted into energy.
Diabetes is a chronic disease where your blood sugar levels (blood glucose) are too high because the normal control mechanisms of your body fail.
There are two types of diabetes, namely type I and type II. The two types are actually two completely different diseases.
Diabetes type I occurs when your body does not produce adequate quantities of insulin. It typically starts in early childhood.
Diabetes type II occurs when your body does not make enough insulin or, even if adequate amounts of insulin are produced, the body fails to transport the glucose from the bloodstream into the body cells. Type II usually starts later in life.
The result of both is that the glucose stays in your blood and cannot be used as an energy source for normal cell functions.
Diabetes leads to serious complications and could even jeopardise your life. It may cause heart disease and strokes and damage the eyes, kidneys and nervous system. Blood sugar levels that are too high or too low can also cause you to fall into a coma.
Diabetes cannot be cured but it can be successfully managed.
Treating diabetes
The treatment of diabetes focuses on the control of blood sugar levels. Treatment involves all aspects of your lifestyle, especially diet and exercise, but most sufferers also use medicine management at some point.
People with diabetes mellitus type I almost always need insulin therapy but lifestyle management is still important. People with diabetes mellitus type II may be able to manage their disease with lifestyle changes but if blood sugar levels cannot be controlled this way, oral anti-hyperglycaemic drugs and even insulin therapy may be required. Treatment of other risk factors such as blood pressure and high cholesterol is extremely important.
PMB entitlement
Diabetes mellitus type I and type II are included on the prescribed minimum benefit (PMB) Chronic Diseases List. This means that your medical scheme must fund the diagnosis, treatment and care of your condition and it must do so from its risk pool and in full.
Your condition must be treated according to the algorithm in the PMB regulations. These algorithms are also available on the Council for Medical Schemes (CMS) website at the following links:
http://www.medicalschemes.com/files/Prescribed%20Minimum%20Benefits/DiabetesMellitus1_2.pdf
http://www.medicalschemes.com/files/Prescribed%20Minimum%20Benefits/DiabetesMellitus2_3.pdf
The disease management interventions that must be funded by the scheme include:
• Consultations with your treating provider (GP or specialist – if authorised by your scheme)
• Lifestyle modification interventions such as dietary and disease education
• Annual eye examination for retinopathy
• Annual comprehensive foot examination
• Pathology tests at 3-6 monthly intervals
• Disease identification card or disc
• Home glucose monitoring
It is important to remember that the scheme may still use managed care protocols which for instance allow only a specific number of consultations with your treating provider per year. These protocols must be supplied to you on request.
If there is a clinical reason or need for more benefits than those specified in the protocol the medical scheme may not refuse to fund these.
The Communications Unit would like to thank Ronelle Smit, Dr Nkuli Mlaba, Dr Selaelo Mametja and Dr Boshoff Steenekamp for making this edition of CMScript possible.
When we eat, the food is broken down into materials that our bodies need to function properly. One of the substances into which food is broken down is the simple sugar glucose. Sugar is absorbed into the bloodstream and stimulates the pancreas to produce insulin. Insulin allows sugar to move from the blood into the cells where it is converted into energy.
Diabetes is a chronic disease where your blood sugar levels (blood glucose) are too high because the normal control mechanisms of your body fail.
There are two types of diabetes, namely type I and type II. The two types are actually two completely different diseases.
Diabetes type I occurs when your body does not produce adequate quantities of insulin. It typically starts in early childhood.
Diabetes type II occurs when your body does not make enough insulin or, even if adequate amounts of insulin are produced, the body fails to transport the glucose from the bloodstream into the body cells. Type II usually starts later in life.
The result of both is that the glucose stays in your blood and cannot be used as an energy source for normal cell functions.
Diabetes leads to serious complications and could even jeopardise your life. It may cause heart disease and strokes and damage the eyes, kidneys and nervous system. Blood sugar levels that are too high or too low can also cause you to fall into a coma.
Diabetes cannot be cured but it can be successfully managed.
Treating diabetes
The treatment of diabetes focuses on the control of blood sugar levels. Treatment involves all aspects of your lifestyle, especially diet and exercise, but most sufferers also use medicine management at some point.
People with diabetes mellitus type I almost always need insulin therapy but lifestyle management is still important. People with diabetes mellitus type II may be able to manage their disease with lifestyle changes but if blood sugar levels cannot be controlled this way, oral anti-hyperglycaemic drugs and even insulin therapy may be required. Treatment of other risk factors such as blood pressure and high cholesterol is extremely important.
PMB entitlement
Diabetes mellitus type I and type II are included on the prescribed minimum benefit (PMB) Chronic Diseases List. This means that your medical scheme must fund the diagnosis, treatment and care of your condition and it must do so from its risk pool and in full.
Your condition must be treated according to the algorithm in the PMB regulations. These algorithms are also available on the Council for Medical Schemes (CMS) website at the following links:
http://www.medicalschemes.com/files/Prescribed%20Minimum%20Benefits/DiabetesMellitus1_2.pdf
http://www.medicalschemes.com/files/Prescribed%20Minimum%20Benefits/DiabetesMellitus2_3.pdf
The disease management interventions that must be funded by the scheme include:
• Consultations with your treating provider (GP or specialist – if authorised by your scheme)
• Lifestyle modification interventions such as dietary and disease education
• Annual eye examination for retinopathy
• Annual comprehensive foot examination
• Pathology tests at 3-6 monthly intervals
• Disease identification card or disc
• Home glucose monitoring
It is important to remember that the scheme may still use managed care protocols which for instance allow only a specific number of consultations with your treating provider per year. These protocols must be supplied to you on request.
If there is a clinical reason or need for more benefits than those specified in the protocol the medical scheme may not refuse to fund these.
The Communications Unit would like to thank Ronelle Smit, Dr Nkuli Mlaba, Dr Selaelo Mametja and Dr Boshoff Steenekamp for making this edition of CMScript possible.
Monday, December 13, 2010
BEQUESTS AND DONATIONS TO TRUSTS
A beneficiary in terms of a will can be a natural person, trust, legal person or institution. The same applies to donations. We will focus mainly on bequests to inter vivos trusts and discuss a few aspects regarding bequests to existing testamentary trusts.
Bequests to an inter vivos trust
Bequests to an inter vivos (family) trust means the bequests are made to a trust already registered at the time a will is drawn up. The trust is named as beneficiary. In the absence of such a trust at the death of the testator, the bequest will lapse or devolve upon another nominated substitute beneficiary.
Bequests may also be made to a family trust to be created after the death of the testator. In this case the beneficiaries and trustees must be named in the will, and the will must also stipulate that if the trust is not registered within a certain period of time (usually two to three months after the appointment of the executor, otherwise the winding up of the estate could be delayed), the bequest will lapse.
Bequests to children, for example, may be made subject to the proviso, or voluntary choice by them, that they create a trust within a specified period of time after the death of the testator and that the trust to be created will become the beneficiary in their stead.
The testator or donor cannot be prescriptive and impose changes on an inter vivos deed of trust and must accept the provisions thereof. The trustees must be able to receive the bequest.
However, as the creator of an inter vivos trust the testator may nominate a trustee in his place or trust beneficiaries in his will, on condition that such powers are bestowed in the deed of trust.
Unconditional bequests are transferred and handed to the trustees by the executor and are administered in accordance with the provisions of the deed of trust. If the bequests are subject to, for example, the payment of a bequest price, the trustees will be given possession of the bequests once that price has been paid.
If, for example, the bequest is subject to a usufruct by the testator’s surviving spouse, the wording of the will is very important. Examples of two types of wording and the implications of the respective bequests are briefly discussed below.
1. “I bequeath my estate to the trustees of the ABC FAMILY TRUST (no. T123/2009) subject to the life usufruct by my said spouse, who will be exempt from furnishing any surety.”
As there is no stipulation that the inheritance must be placed under the control of the trustees, the fixed property (with registered or recorded usufruct) will, as in the case of an “ordinary” usufruct, be transferred in the name of the trust, and other assets such as shares and investments will be transferred in the name of the usufructuary and cash will be paid out to her.
She may occupy the property or let it and all income is payable to her direct. She is responsible for the payment of expenses such as rates and taxes, utility accounts and ordinary maintenance, but not for larger expenses in respect of damage not caused by her or for wear and tear. The latter costs are be payable by the trust as the bare owner. The trust is also responsible for the payment of short-term insurance premiums if not taken out voluntarily and maintained by the usufructuary.
The trustees therefore has control over only the fixed property, as well as any other trust assets not passed by inheritance, and will only gain full control of the rest of the usufruct assets once the usufruct has ended.
Should the trust be terminated before the usufruct ends, the capital beneficiaries will be replaced as bare owners.
2. “I bequeath my estate to the trustees of the ABC FAMILY TRUST (no. T123/2009) who are to administer it to the benefit of the beneficiaries in terms of the deed of trust, subject to the life usufruct by my said spouse, who will be exempt from furnishing any surety. I stipulate explicitly that this inheritance will vest in the trustees and be administered by them.”
This provision makes it very clear that the trustees will be in full control of all usufruct assets, including other trust assets. In this case not only the fixed property but also all other estate assets will be transferred in the name of the trust and cash will be paid to the trust. The trustees will be responsible for the letting of the fixed property, expenses, insurance and maintenance of assets and investments.
The usufructuary will still be able to occupy the dwelling and enjoy the right of use of movable property such as furniture and vehicles. The trustees will have to administer the assets inherited from the estate separately from the other trust assets, for various reasons. One of these is that only the spouse as usufructuary is to receive all net income from the usufruct assets, and other income beneficiaries of the trust cannot share in this.
Income cannot be paid to her at the discretion of the trustees and she is not entitled to part of the capital as stipulated in the deed of trust. However, she may also be an income beneficiary in respect of the other trust assets. Therefore there must also be a separate income and expenditure account.
It is also important that when the usufruct ends, the usufruct assets can be identified easily for the calculation of estate duty and capital gains tax. After that they can become mixed up with the other trusts assets and only one income and expenditure account will be required.
If the trust is terminated before the usufruct ends, the capital beneficiaries will also be replaced as bare owners.
Bequests to an existing testamentary trust
This is when testator A bequeaths some or all of his estate assets to the testamentary trust of the late B, who is already deceased when A’s will is drawn up.
The testamentary trust of the late B must therefore already be active and in operation when testator A dies, otherwise no vesting can occur at the death of testator A. The bequest will then lapse or devolve upon another substitute (nominated) beneficiary.
Testator A (or a donor) can also not be prescriptive and impose changes on an existing and active testamentary trust of the late B and must accept the provisions thereof. It is also important that the trustees have the right to accept and receive the bequest.
Unconditional bequests are transferred and handed to the trustees of testator B’s testamentary trust by the executor of testator A and are administered in accordance with the provisions of the will of that trust. If the bequests are subject to, for example, the payment of a bequest price, the trustees will be given possession of the bequests once that price has been paid.
There may be more than one active trust in terms of the same will of the late B, with different provisions and beneficiaries. Testator A must therefore stipulate very clearly to which existing active trust of the late B such bequest is to be made.
The same principles as in 1 and 2 above can be applied to a bequest to an existing testamentary trust of the late B subject to a limited right, such as a usufruct in favour of the surviving spouse of testator A. If the trust of the late B is terminated prior to the termination of the usufruct, the capital beneficiaries will also be replaced as the bare owners.
General comments
As far as bequests to existing testamentary trusts (“the late B”) are concerned, it is recommended that the testator (“A”) should rather have the bequest held in trust and administered by the trust created in his own will.
A trust may not be misused to temporarily keep other assets and funds in it for other purposes, with own fixed rules.
Source: Sanlam Trust, No 3/2009- Nov 2009
Bequests to an inter vivos trust
Bequests to an inter vivos (family) trust means the bequests are made to a trust already registered at the time a will is drawn up. The trust is named as beneficiary. In the absence of such a trust at the death of the testator, the bequest will lapse or devolve upon another nominated substitute beneficiary.
Bequests may also be made to a family trust to be created after the death of the testator. In this case the beneficiaries and trustees must be named in the will, and the will must also stipulate that if the trust is not registered within a certain period of time (usually two to three months after the appointment of the executor, otherwise the winding up of the estate could be delayed), the bequest will lapse.
Bequests to children, for example, may be made subject to the proviso, or voluntary choice by them, that they create a trust within a specified period of time after the death of the testator and that the trust to be created will become the beneficiary in their stead.
The testator or donor cannot be prescriptive and impose changes on an inter vivos deed of trust and must accept the provisions thereof. The trustees must be able to receive the bequest.
However, as the creator of an inter vivos trust the testator may nominate a trustee in his place or trust beneficiaries in his will, on condition that such powers are bestowed in the deed of trust.
Unconditional bequests are transferred and handed to the trustees by the executor and are administered in accordance with the provisions of the deed of trust. If the bequests are subject to, for example, the payment of a bequest price, the trustees will be given possession of the bequests once that price has been paid.
If, for example, the bequest is subject to a usufruct by the testator’s surviving spouse, the wording of the will is very important. Examples of two types of wording and the implications of the respective bequests are briefly discussed below.
1. “I bequeath my estate to the trustees of the ABC FAMILY TRUST (no. T123/2009) subject to the life usufruct by my said spouse, who will be exempt from furnishing any surety.”
As there is no stipulation that the inheritance must be placed under the control of the trustees, the fixed property (with registered or recorded usufruct) will, as in the case of an “ordinary” usufruct, be transferred in the name of the trust, and other assets such as shares and investments will be transferred in the name of the usufructuary and cash will be paid out to her.
She may occupy the property or let it and all income is payable to her direct. She is responsible for the payment of expenses such as rates and taxes, utility accounts and ordinary maintenance, but not for larger expenses in respect of damage not caused by her or for wear and tear. The latter costs are be payable by the trust as the bare owner. The trust is also responsible for the payment of short-term insurance premiums if not taken out voluntarily and maintained by the usufructuary.
The trustees therefore has control over only the fixed property, as well as any other trust assets not passed by inheritance, and will only gain full control of the rest of the usufruct assets once the usufruct has ended.
Should the trust be terminated before the usufruct ends, the capital beneficiaries will be replaced as bare owners.
2. “I bequeath my estate to the trustees of the ABC FAMILY TRUST (no. T123/2009) who are to administer it to the benefit of the beneficiaries in terms of the deed of trust, subject to the life usufruct by my said spouse, who will be exempt from furnishing any surety. I stipulate explicitly that this inheritance will vest in the trustees and be administered by them.”
This provision makes it very clear that the trustees will be in full control of all usufruct assets, including other trust assets. In this case not only the fixed property but also all other estate assets will be transferred in the name of the trust and cash will be paid to the trust. The trustees will be responsible for the letting of the fixed property, expenses, insurance and maintenance of assets and investments.
The usufructuary will still be able to occupy the dwelling and enjoy the right of use of movable property such as furniture and vehicles. The trustees will have to administer the assets inherited from the estate separately from the other trust assets, for various reasons. One of these is that only the spouse as usufructuary is to receive all net income from the usufruct assets, and other income beneficiaries of the trust cannot share in this.
Income cannot be paid to her at the discretion of the trustees and she is not entitled to part of the capital as stipulated in the deed of trust. However, she may also be an income beneficiary in respect of the other trust assets. Therefore there must also be a separate income and expenditure account.
It is also important that when the usufruct ends, the usufruct assets can be identified easily for the calculation of estate duty and capital gains tax. After that they can become mixed up with the other trusts assets and only one income and expenditure account will be required.
If the trust is terminated before the usufruct ends, the capital beneficiaries will also be replaced as bare owners.
Bequests to an existing testamentary trust
This is when testator A bequeaths some or all of his estate assets to the testamentary trust of the late B, who is already deceased when A’s will is drawn up.
The testamentary trust of the late B must therefore already be active and in operation when testator A dies, otherwise no vesting can occur at the death of testator A. The bequest will then lapse or devolve upon another substitute (nominated) beneficiary.
Testator A (or a donor) can also not be prescriptive and impose changes on an existing and active testamentary trust of the late B and must accept the provisions thereof. It is also important that the trustees have the right to accept and receive the bequest.
Unconditional bequests are transferred and handed to the trustees of testator B’s testamentary trust by the executor of testator A and are administered in accordance with the provisions of the will of that trust. If the bequests are subject to, for example, the payment of a bequest price, the trustees will be given possession of the bequests once that price has been paid.
There may be more than one active trust in terms of the same will of the late B, with different provisions and beneficiaries. Testator A must therefore stipulate very clearly to which existing active trust of the late B such bequest is to be made.
The same principles as in 1 and 2 above can be applied to a bequest to an existing testamentary trust of the late B subject to a limited right, such as a usufruct in favour of the surviving spouse of testator A. If the trust of the late B is terminated prior to the termination of the usufruct, the capital beneficiaries will also be replaced as the bare owners.
General comments
As far as bequests to existing testamentary trusts (“the late B”) are concerned, it is recommended that the testator (“A”) should rather have the bequest held in trust and administered by the trust created in his own will.
A trust may not be misused to temporarily keep other assets and funds in it for other purposes, with own fixed rules.
Source: Sanlam Trust, No 3/2009- Nov 2009
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