Why an intervivos trust as opposed to a testamentary trust?

by Shiniade Kenworthy

An intervivos trust is a trust created during the lifetime of the Founder. A Testamentary trust is a trust created on the death of a Founder.

A question that often arises is, why not simply create a testamentary trust and in that way the Founder does not have to administer and incur the costs of same during his lifetime?

The answer is simple: The death benefits of creating an intervivos trust far exceed the cost (both in time and money). In terms of The Estate Duty Act, 45 of 1955, on death a duty is levied against your estate known as estate duty, which duty is levied at 26.6% of the nett value of your estate. The nett value of any estate will be determined by deducting all liabilities from your assets of your estate, both real and deemed (for eg insurance policies). Should you create a testamentary trust on death the assets are in your name and will need to be transferred to the trust posthumously, meaning all assets are taken into account when assessing the duty payable. Should, however, you create an intervivos trust and transfer the assets held in your name into the trust, and going forward build your family’s wealth in the trust the state cannot take into account those assets on your death as they do not belong to you.

Keep in mind that there is an allowance of three and a half million rand (as it currently stands) which is not taxable. Do not, however, be swayed by this. Most individuals own a property or two, various investments and movable assets. Add to this the deemed assets like your life policy and you can see that it is a figure which can easily be attained.

What one also avoids when creating an intervivos trust is capital gains tax on any capital assets owned. This is particularly advantageous for property investors. On death you are deemed to have disposed of your assets to your deceased estate. A disposal of a capital asset automatically brings about a capital gains tax obligation. The highest rate payable in your personal capacity is 13.3%. Should you create a testamentary trust you still need to transfer the properties (and/or business interests) to your trust and so a capital gains tax obligation will arise. If the capital asset is, however, owned by a trust and not yourself it cannot be taken into account when determining your capital gains tax obligations. There too is an allowance in terms of capital gains tax and property. On disposal of your primary residence there is no capital gains tax payable on the first one and a half million rand gain. This also is a carrot which the government dangles to persuade us to hold our properties in our own name. Weighed against all the benefits of having your trust own the property this ‘benefit’ is nothing more than a red herring.

Furthermore, in creating a testamentary trust as opposed to an intervivos trust, you create a stumbling block for the smooth transition of your assets from your estate to your heirs. Keep in mind that on death your estate is frozen during the winding up process. If your estate is a medium to large estate, this can take up to two years to finalise. During this time your family has little, if no access to your estate. Only once the assets are transferred to the testamentary trust do they have access to same.

An intervivos trust, on the other hand means that you, in your personal capacity, have little or no assets as the trust is the owner of same. Your death therefore has no impact on those assets and your family has immediate access to same.

Another concern is the drafting of the testamentary trust. The terms and conditions of a testamentary trust are incorporated in your Last Will and Testament. The individual drafting same may not necessarily be skilled on trust law and as a result the contents thereof may not protect you sufficiently. The contents of a trust deed are very important as that is where your protection stems from. Therefore, if the pertinent control, abuse and tax issues are not addressed you may find yourself in a very precarious position.

In conclusion, we advise, rather create your trust during your lifetime, ensure you are protected TODAY and on death name the family trust as your heir so that anything that may be left in your personal capacity flows into the trust. In this way, you can be secure in the knowledge that you are not only protecting you and your family on death by avoiding the aforementioned pitfalls of a testamentary trust but also in life.