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By donation:

◆◆ The estate planner will pay donations tax on the value of the assets
donated to the trust. The first R100,000 per annum per natural person is
exempt from donations tax.

By sale:

◆◆ Assets can be sold to the trust at fair market value against a loan account.
The sale must be at fair market value, otherwise the estate planner will
probably have to pay donations tax. In order to gradually reduce the loan
account, the estate planner may then donate up to R100,000 each year
to the trust without attracting any donations tax liability. The balance of
the loan account will be included in his estate when he dies.

◆◆ Due to the anti-avoidance rules relating to interest-free loans, a sale
by way of an interest-free loan should only be considered when the
expected future growth of the asset sold is to exceed the SARS Official
Interest Rate.

◆◆ Although interest free loans do not constitute a donation under the
prevailing Income Tax Act, they do amount to a gratuitous disposition for
the purposes of Section 7 of the Income Tax Act.

■■ Bequests to a trust for the benefit of a surviving spouse may or may not
qualify for the Section 4(q) deduction, depending on how the trust deed has
been drawn up.

D Capital gains tax and Trusts

■■ With the introduction of capital gains tax, the effectiveness of the use of
trusts in estate planning has been slightly negated, but with careful planning
the impact of capital gains tax can be reduced and even completely avoided.

■■ Capital gains tax is payable by any trust in South Africa on any gains made
due to a disposal of assets after 1 October 2001.

■■ For ordinary trusts, and special testamentary trusts, 80% of the net gain is
added to the taxable income of the trust. As trusts are taxed at a flat rate of
45% on taxable income, the effective rate of tax on capital gains will be 36%.
There is no primary residence rebate for these trusts.

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