FINANCES
He who deals with
trusts, BEWARE!
We find more and more clients considering whether or not they should move all their life
insurance policies into the trust as well. As with all financial planning scenarios, there is
not one single answer that will suffice in all situations.
Lucas Coetzee
Liberty Law Specialist
E
ach and every case must be
considered on merit. Having said
that, one would need to careful-
ly consider the implications of such an
action before embarking on the process
of replacing individually owned policies
with trust owned policies when it comes to
personal financial planning requirements.
trusts do not have one. Making sure that
the trust has a bank account, will also
ensure that payment of the proceeds is
not delayed in the event of death of the life
assured. Take into account the fact that the
trust needs to actually have the liquidity to
pay the premiums. Neither of these factors
should be accepted as a given.
❸ Who will ultimately benefit
be lost?
Where a spouse was the nominated bene
ficiary and that nomination is changed to
a trust, then the section 4(q) deduction (of
the Estate Duty Act) could potentially be
lost and proceeds could become liable
for duty. The amount taken into account
as deemed property may be reduced by
return of contributions plus 6% per annum
if the trust is both the payer and benefi-
ciary. In only very limited and specific cir-
cumstances will the section 4(q) deduction
be retained. Essentially, losing the section
4(q) deduction could mean that as much
as 20% to 25% of the proceeds could be
lost to SARS in the form of estate duty. It
also means that you should increase the
sum assured to cater for this additional tax. from the proceeds?
Policy benefits pay to the policyholder,
which would be the trust. That means that
the trustees acting within the constraints
of the trust deed, decide how and to
whom to distribute the benefits. Consider
whether the life assured is in fact a trust
beneficiary, and if so – what kind of bene
ficiary – income and/or capital? This is
particularly relevant when benefits other
than life cover are included in the policy.
How much, if any, of the proceeds of the
policy will ultimately be paid to the person
who has suffered the permanent disability,
impairment or dread disease? Does the
assured person actually want these bene-
fits to pay into the trust and does he fully
understand the implications thereof? What
happens if the consent of all the trustees
is required to deal with an asset and the
life assured (who is in a coma) is one of
the trustees and is unable to give that
consent?
❷ Does the trust have a bank ❹ How is the spouse affected if the
Factors to consider
❶ Will the Section 4(q) deduction
account?
In order for the trust to be the payer, it
must have a bank account. This is a pre-
requisite for a trust in terms of the Trust
Property Control Act, and yet so many
policy proceeds and all other assets
are bequeathed to a trust?
The surviving spouse will be restricted by
the decisions of the trustees. The income
or capital received will in many instances
always be at the discretion of the trus
tees and he/she will therefore not enjoy
financial independence. This could hinder
his/her ability to perform basic financial
transactions as he/she may never have
a guaranteed fixed income – he/she
may not even be able to open a clothing
account in his/her own name! Consider
the financial transactions that require
proof of income in order to glimpse how
debilitating this can be. Unless there are
extraordinary circumstances at play, the
surviving spouse should be permitted a
degree of financial independence and
consideration should be given to some
benefit being paid directly to that person.
❺ What are the fees that will be
incurred by the trust?
The independent trustee may charge a
fee based on assets under management.
That means on an annual basis the trus
tee will receive a percentage of the value
of all the assets (including the proceeds
of the life insurance policy) held by the
trust. Consider this in the context of the
planner who establishes a trust to reduce
his costs, taxes, etcetera, upon his death.
The trustee’s fees are seldom fixed for
the long term; upon the planner’s death,
these fees could amount to considerably
more than anticipated. Add to this, while it
is not a legislative requirement, if the trust
deed so provides then the trust must be
audited – more fees and costs that must
be added to the equation.
Click on the link http://senwes.co/
LukasCoetzeeTrusts or scan the
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SENWES SCENARIO | HERFS • AUTUMN 2020
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