Freedom of testation

Can I choose who to benefit in my will?

In South Africa, a person can leave his or her assets to whoever he likes, with few limitations. This is called “freedom of testation“. If a person dies with a valid will, he or she dies “testate”, and without a valid will, he or she  dies “intestate”.

Testate succession

An executor (the person appointed to wind up the estate) must carry out the wishes of the testator (the person making the will) as far as legally possible. The freedom of testation is limited by the common law in these situations:

·         A provision in a will shall not be executed if (a) it is generally unlawful, (b) against public policy, (c) impracticably vague, or (d) impossible; and

·         The estate is obliged to support any minor and financially dependent children.

There are certain acts that limit the testator’s freedom to choose his beneficiaries in his will, e.g.

·         In terms of the Pension Funds Act, the deceased can’t choose who to benefit. The decision will be up to the pension fund administrators;

·         A surviving spouse (who has been excluded from the will) may have a claim against the estate for maintenance in terms of The Maintenance of Surviving Spouses Act;

·         If the testator disinherits his wife, and they are married with the accrual system, the wife has a claim against his estate for ½ the difference between the accruals (if her estate is the smaller of the two).

Intestate Succession

If a person dies without a will, his or her estate is wound up in accordance with the Intestate Succession Act.

This is not a detailed exposition of the law but a mere synopsis. Contact your lawyer for comprehensive advice. 

The effect of no-interest loans to trusts

One way of avoiding estate duty and donations tax is to sell an asset to a family trust for a market related value.

The rationale is to freeze the growth of the assets in the taxpayer’s estate for estate duty purposes. The income tax benefits would accrue to the beneficiaries of the trust after the death of the taxpayer, as the income received by the trust and distributed to them would be taxed in their own hands at their respective tax rates. 

Where the problem arises, for SARS, is that the selling price of the asset is usually payable, interest-free, on loan account. Following the sale of the asset, the purchase price due by the trust is reduced every year by the taxpayer waiving R100 000 of the loan. This waiver would be exempt from donations tax and no CGT implications would arise for the trust, the debt would be reduced by way of a donation.

To close the us gap, section 7C was introduced to the Income Tax Act to address situations where assets are disposed of to a trust on interest-free loan account. The effective date is 1 March 2017, and provides that where there is an interest-free loan or a loan which is repayable at an interest rate below the official rate (currently set at 8%), the difference between the set interest rate (usually 0%) and the official rate (namely 8%) is regarded as a donation which will attract donations tax levied at a rate of 20%. 

One effect of the application of section 7C would be that any interest forgone by the taxpayer in respect of the interest free or low interest loan would be treated as an ongoing and annual donation to the trust. The good news is that natural person (or a company that is a connected person in relation to that natural person), are not precluded from employing the annual donations tax exemption of R 100,000.00 donation to the trust. If an individual donates R 100,000.00 or less, section 7C will not be applicable and no interest will be deemed to have accrued to the individual.

For larger donations, the effect may be to neutralise the historic estate planning structures.