Testamentary reservations of trust and company assets

Estate Duty Implications

We often see individuals establish companies and inter vivos Trusts with the intention of establishing purpose-driven Succession Plans. Yet, it often happens that these individuals retain a semblance of control over these assets, which results in them being able to bequeath these assets through their Wills.

This testamentary provision allows an individual to dispose of an asset as though it were their own and this in turn has an implication on their dutiable Estate and therefore Estate Duty.

Estate Duty Act

Section 3(3)(d) of the Estate Duty Act states that any property that the deceased was, immediately prior to his/her death, competent to dispose of for their own benefit or for the benefit of their Estate, should be seen as property of the deceased. This means that under certain circumstances, assets which were not the property of the deceased may be subject to Estate Duty as though they were in fact the deceased’s assets.

According to the Act, an individual is deemed/considered to be able to dispose of an asset

“if, under any deed of donation, settlement, trust, or other disposition made by him, he [has] retained the power to revoke or vary the provisions thereof relating to such property.

 Testamentary Reservation

Definition

A clause in a Trust Deed that grants a specific person the power to determine, in their Last Will and Testament, certain aspects relating to Trust assets, including determining the vesting or termination date and/or the formula for the distribution of the Trust assets with regard to capital and/or income.

When this clause is used, it compels SARS to apply Section 3(3)(d) to the assets, and the assets will, therefore, be seen as property in the deceased’s Estate, for Estate Duty purposes.

When Testamentary reservation applies

If it can be proven that the property and/or assets held within an entity was in fact held for the benefit of the deceased, then that property and/or asset should fall within the dutiable Estate of the deceased.

Where an individual who is the owner and director of the company:

• Stipulates in his last Will and Testament that the company assets should be sold to another individual; or
• Specifically bequeaths such company assets in terms of their last Will and Testament; or
• If a director’s resolution is passed to the effect that such assets be disposed of or transferred after the death of the individual.

This power to appropriate or dispose of such assets as the person may have deemed fit, whether exercisable by Last Will and Testament, power of appointment or any other manner, could have the same effect as a testamentary reservation.

Example of Testamentary Reservation

An individual owns a company, of which the value of the shareholding is R5 million, and the company owns a property to the value of R2 million, the individual has stipulated in their last will and Testament that the property should be sold, and the proceeds transferred to his children, the value of the shareholding is property in the individual’s Estate and the property owned by the company will be included as deemed property in the individual’s Estate for Estate duty purposes. Therefore, Estate duty will be levied on the R5 million shareholding as well as the R2 million property.

The actual exercise of these powers is not the real issue. The potential to exercise such power means the deceased was competent to dispose of the assets. This means that merely having the relevant clause or resolution in place, in terms of the deeming provisions, even if the power and competency have not been exercised, may result in the application of Section 3(3)d.

 Avoiding the unintentional implication of Testamentary Reservations

These unintended implications can be avoided by ensuring the Trust Deed does not grant a power of testamentary reservation and instead an appropriate letter of wishes that is addressed to the trustees can be drafted and put in place. Company assets can be dealt with by the succeeding directors and shareholders, for which provision and intention can also be stipulated in a letter of wishes as well as relevant provisions be put in place within the company structure.

It is important to ensure that your Will is correctly drafted to avoid these silent pitfalls and you should engage with a specialist when Trusts and companies form part of your Estate and Succession Plan.