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Estate planning: understanding the technical jargon

Examining the more commonly used phrases and terms in estate planning.

If you’re undertaking an estate planning exercise, you may be faced with complex legal and technical jargon. In this article, we examine some of the more commonly used phrases and terms in estate planning.

Special trust

Special trusts can be set up in terms of Section 6B of the Income Tax Act and are effective estate planning tools for those with minor children, or those who have beneficiaries with serious mental or physical disabilities. A Special Trust Type A, which can be set up as a testamentary or inter vivos trust, is ideal for safeguarding assets for beneficiaries with special needs, and this type of trust enjoys preferential tax rates. Special Trust Type B, which take the form of a testamentary trust, are suitable for housing assets bequeathed to minor children until they are old enough to manage their own affairs.

Testamentary trust

As per the above, a testamentary trust is a special trust (Type B) that is set up in terms of the testator’s will and only comes into existence upon the death of the testator. In terms of our law, minor beneficiaries are not able to inherit and therefore testamentary trusts are excellent vehicles to house assets intended for minor children or beneficiaries, although they do not enjoy the same preferential tax rates as Type A trusts.

Inter vivos trust

Unlike a testamentary trust which comes into existence on the founder’s death, an inter vivos trust is created during the founder’s lifetime to house certain assets or investments. An inter vivos trust is created by a trust deed that sets out the duties and responsibilities of the trustees, how the assets are to be managed, who the beneficiaries are, and what the intention of the trust is. Inter vivos trusts can be effective estate planning tools to ensure succession and reduce estate costs.

Donations tax

Donations are regularly used as a means of reducing estate duty and are regulated by the Income Tax Act. For individuals, donations are subject to donations tax of 20% on the first R30 million of donations made in a tax year; thereafter, donations in excess of R30 million are taxed at 25%, with an annual exemption of R100 000. Where a person has a sizeable estate, they may use their annual exemption of R100 000 to reduce the value of their estate during their lifetime to minimise estate duty.

Trust instrument

The founder of the trust must use a trust instrument to formally define the framework of the trust. Where the trust founder sets up an inter vivos (or living) trust, the trust deed will be regarded as the trust instrument. Where the founder sets up a testamentary trust in terms of their will, the will is regarded as the trust instrument.

Estate residue

A well-drafted will makes reference to the residue of your estate. Your estate’s residue is everything that is left in your estate after all debts and administration costs have been paid, and after all legacies or special bequests have been distributed. Your heirs will inherit your estate’s residue.

Heirs and legatees

If you die without a will, your heirs are those beneficiaries who stand to benefit from your estate in terms of the law of intestate succession. If you die with a valid will in place, your heirs would be those beneficiaries who inherit the residue of your estate. On the other hand, a legatee is not a recognised beneficiary in terms of the law of intestate succession and will need to be specifically identified in your will. For instance, if you want to make a special bequest in your will to your best friend, they would be regarded as a legatee.

Bequests

As per the above, a testator can make a special bequest in their will if they want to leave a particular asset to a beneficiary (legatee), bearing in mind that the beneficiary does not need to be related to them. After your executor has settled any debt and paid your estate administration costs, your legatees will then receive any legacies bequeathed to them in terms of the will.

Bewind trust

A bewind trust, or vested trust, is a trust where the founder transfers ownership of the trust assets to the beneficiaries, but where the trustees retain administration and control of the trust assets. In this type of trust, while the beneficiaries own the assets, the trustees are responsible for managing the assets for the benefit of the beneficiaries and they do not have discretion in terms of the trust instrument, making it essential that the income and capital beneficiaries are clearly set out in the trust instrument.

Discretionary trust

Where the trust is a discretionary one, the beneficiaries do not have a vested right to the income until the trustees have exercised their discretion. Trustees of a discretionary trust have discretionary powers to allocate the income and capital of the trust to the beneficiaries as they see fit.

Estate duty

Estate Duty is a tax on deceased estates which is levied in terms of the Estate Duty Act. In terms of current legislation, estate duty is charged at 20% on the dutiable amount of the estate exceeding R3.5 million up to R30 million, and 25% after R30 million, and applies to both property and deemed property. A well-designed estate plan will aim to minimise your estate duty liabilities.

Deemed Property

Deemed property refers to assets that did not exist at the date of death, but which are included in the dutiable estate of the deceased. The deemed property includes the amounts recoverable from a life insurance policy on the life of the deceased and lump sum payments payable from the deceased’s retirement fund. Ensure that your estate plan includes all property, including deemed property, to ensure that you fully understand your tax liabilities and liquidity position in the event of your death.

Usufruct and bare dominium

A usufruct is created where a testator gives someone the right to the income or use of a specific asset, such as a house. For example, a husband may grant his wife usufruct over their home until she dies, although he may bequeath the asset to his son. The wife is known as the usufructuary and she has the rights and enjoyment of the property during her lifetime. The son is the holder of the bare dominium (right of ownership) while his mother is still alive. On his mother’s passing, the full title of the property will vest with the son.

Fideicommissum

A fideicommissum is a provision in a will where a person inherits an asset on the condition that it must pass to someone else at a future date or at a particular occurrence. It is designed to enable a person to retain assets, such as a farm, within the family for future generations, although there are statutory limitations on the length of time a fideicommissum can be used.

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