If you've spent the last two or three decades building a business, you've already done the hard part. What's less obvious is that success itself creates a new risk: your business becomes your family's single largest asset, and one day it will need to change hands without undoing what took decades to build.

The risk

South African estate duty is levied at 20% on the dutiable value of your estate up to R30 million, and 25% on anything above that. Every estate receives a R3.5 million abatement before estate duty applies. This abatement is transferable between spouses, but for a business owner whose company forms the bulk of their net worth, the maths adds up quickly. On a R50 million dutiable estate, for example, estate duty alone can exceed R10 million once the abatement is applied and the R30 million threshold is crossed.

This estate duty must be paid in cash, on death, before assets can be distributed. If most of your wealth sits in illiquid assets such as a trading business or fixed property rather than liquid investments such as a unit trust investment portfolio or life insurance, your executor may be forced to sell assets, sometimes at a discount, sometimes at the worst possible time simply to settle the bill; this is where we find the infamous “One man's death is another man’s bread”

Why structuring, and why now (Click Here)

The most established way to manage this risk is to move growth assets out of your personal estate and into an inter vivos trust while you're still alive and able to make the decisions. Assets held in a properly structured inter vivos trust do not form part of your dutiable estate at death, because legally, you no longer own them; the trust does.

There are primarily two main ways to fund a trust, and each carries its own tax consequences and complexities:

• Donate the assets to the trust. Donation’s tax applies at 20% on cumulative donations up to R30 million, and 25% above that, though every individual has an annual exemption (R 150 000 per individual at the time of writing) that can be used systematically, year after year, to shift value into the trust tax-free.
• Sell the assets to the trust on a loan account, at the interest rate prescribed by SARS. This is the more common route for larger or growing assets, because it doesn't trigger an immediate donations tax event, but it comes with a well-known catch, namely Section 7C of the Income Tax Act.

Section 7C of the Income Tax Act is an anti-avoidance provision that treats interest-free or low-interest loans made to trusts or connected companies as annual deemed donations subject to donation tax. Therefore, if you sell assets to your trust on an interest-free or low-interest loan, SARS treats the interest you didn't charge as a donation under Section 7C of the Income Tax Act, and that deemed donation is taxed at 20% every year the loan remains outstanding, over and above your annual exemption. This is one of the most common mistakes in trust structuring: business owners set up the loan account correctly at the onset, then forget it needs ongoing management. Therefore, a potential well-run structure might look as follows:

1. Move growth assets into the trust - via donation, or sale on loan account.
2. Create the loan account at the point of sale - this "pegs" your estate at today's value, while all future growth happens inside the trust, which is outside your estate.
3. Reduce the loan account gradually - typically through annual donations within the personal exemption threshold, so the pegged value itself eventually leaves your estate too.
4. Maintain the structure - Section 7C compliance, accurate loan account bookkeeping, and annual alignment between your tax and estate planning strategy aren't optional extras. A trust that isn't actively maintained can unravel the very protection it was built to provide.

How we approach estate planning and structuring

We begin with a clear-eyed assessment of your current estate, business structure, and family objectives. We then design and implement the inter vivos trust and supporting companies with specific attention to Section 7C compliance, accurate loan-account bookkeeping, professional valuations where required, and annual alignment between tax and estate planning. The goal is not a static document but a living structure that “pegs” today’s value in your estate while allowing future growth to accumulate outside of it, and that remains maintainable over decades.

From idea to concept to implementation, each phase needs to be handled with care and diligence to ensure your structure is built on a solid foundation.

Prepared by: Craig Leach - Wealth & Investment Adviser.

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