Protecting your legacy: widow's trust

Drawing up a valid Last Will and Testament is one of the most important parts of the financial planning process and comprises much more than just nominating Heirs and appointing an Executor to administer your Estate.

Widow’s Trust: Providing for your Spouse

As you build your legacy it is important to ensure that you put the correct structures in place to protect your legacy both during your lifetime and when your Heirs benefit from it. One avenue through which you can do this is a Widow’s Trust, which is created through specific clauses in your Will. A Widow’s Trust is primarily used for the benefit of a surviving Spouse, who may not be in a position to handle finances due to lack of experience and/or knowledge, and at the same time it offers some protection from any future matrimonial agreements, creditors, etc. This financial planning structure provides assurance that the capital is protected and preserved so that your legacy can ultimately be passed onto your children and future generations.

Tip: Investment of the Capital which comprises cash or investments needs to be managed by a financial advisor.

Tax Benefit of a Widow’s Trust

It is important to know that the bequest to a Widow’s Trust qualifies for an Estate Duty deduction, in terms of Section 4q(ii) of the Estate Duty Act, and therefore works very well as an estate planning tool. Bear in mind, though, that on the death of the surviving Spouse there will be an Estate Duty implication on his/her Estate, although the assets are owned by the Widow’s Trust.

In terms of Section 3(2)(a) of the Estate Duty Act, property includes “any fiduciary, usufructuary, or  other like interest”. This is because the surviving Spouse is the sole income beneficiary during their lifetime, and the capital beneficiaries may not have access to the capital until the death of the surviving Spouse. The Trust is structured in this way to qualify for the Section 4q deduction.

The amount included for Estate Duty purposes may be substantial and the following calculation is used to determine it:

=The bare dominimum vaue annualised at 12% (Sars’ official rate) X the expectancy factor of the surviving spouse.

Tip: You should ensure that there is sufficient liquidity available in the surviving Spouse’s Estate to cover such tax liabilities.

A Widow’s Trust is not recognised as a special Trust, so any income generated in the trust is taxed at 45%. If Section 25B of the Income Tax Act is applied, the income is distributed to the surviving Spouse as the income beneficiary, and this is known as the Conduit Principal, which when taxed in their personal capacity is taxed at their individual marginal rate.

Furthermore, any capital gain within the Trust is taxed at 36%. You cannot apply Paragraph 80(20) of the Eighth Schedule to alleviate this, because capital beneficiaries may not benefit until the death of the income beneficiary.

Planning your legacy means making use of the financial planning mechanisms at your disposal and consulting your Financial Advisor on what will be best for you and your family.