In the realm of personal finance, we often seek ways to circumvent the inevitable: death and taxes. This quest for financial immortality leads many into the arms of self-proclaimed experts who promise miraculous solutions. Yet, as history has repeatedly shown, such promises are often mirages in the desert of fiscal responsibility.
Consider the tale of a sweet 70-year-old man armed with good intentions and a R20-million home. He encountered estate planning “experts” who proposed a scheme I’ve heard all too often: transfer the home to a company owned by a trust, ostensibly to protect his wife’s future and minimise tax burdens.
The proposal seemed elegant on the surface. It promised to peg the estate’s value, sidestep estate duty, and evade capital gains tax. A financial sleight of hand that would make even the most seasoned magician envious and SARS sceptical. But like all illusions, it crumbled under scrutiny.
The Hidden Costs of Complexity
Let us dissect the scheme and why it makes me so angry. When transferring property to a trust, there are several significant financial consequences:
- Capital Gains Tax (CGT): Approximately 18% of the property value, payable in the current tax year (approximately R3 142 000).
- Transfer Costs: The buyer, effectively the same person, must pay transfer duty and associated costs (amounting to R2 323 218).
- Trust Ownership Structure:
- Option 1: Property donated to the trust, incurring 20% tax immediately.
- Option 2: The trust takes ownership via a loan account, leading to ongoing tax obligations. If using a loan account, the owner must pay income tax on deemed interest every year until he dies (currently 8% per year) even though no actual interest is received. (Assuming deemed interest income of R1 778 560, this results in tax payable every year of R602 049 on money that the client has lent to his family trust.)
- Estate Duty: The loan account remains an asset in the owner’s estate, subject to estate duty upon death (R4 464 643).
Add to this the fees for setting up and maintaining such a complex structure, and the financial burden becomes clear. The promise of tax avoidance transforms into a costly exercise in financial gymnastics.
In contrast, a straightforward approach – leaving everything to his wife – would incur no capital gains tax, no estate duty, and minimal transfer costs. The simplicity of this solution stands in stark contrast to the convoluted scheme proposed by the “experts”.
This case reminds us of the importance of critical thinking in financial matters. Benjamin Franklin noted in 1789, “Nothing is certain except death and taxes.” This wisdom remains relevant today. While financial planning is essential, pursuing what effectively comes down to improbable tax evasion schemes often simply leads to complications and unforeseen costs.
A will should be a straightforward document that aligns with one’s assets and beneficiary nominations. It should be easy for executors to implement, not difficult to interpret.
What I’m trying to say is that effective solutions are often simple. Seek advice, but always question and examine. Financial wisdom lies not in avoiding the inevitable but in preparing for it with clarity and purpose.
