THE RISK OF SECTION 3(3)(d) OF THE ESTATE DUTY ACT
- WHAT IS A TESTAMENTARY RESERVATION IN A TRUST DEED?
A testamentary reservation is a stipulation which is often found in trust deeds for especially family trusts in terms of which the founder or one of trustees will have the power to prescribe the distribution of assets or a formula for the distribution of income and capital amongst a predefined group or class of trust beneficiaries upon that person’s death. Thus, in effect, it is a right given to a nominated person to unilaterally make very important decisions relating to the assets of a trust without having to follow the normal due process as provided for in the trust deed.
- WHAT DOES SECTION 3(3)(d) OF THE ESTATE DUTY ACT SAY?
Section 3(3)(d) of the Estate Duty Act (“the Act”) states that property of which the deceased was immediately prior to his death competent to dispose of for his own benefit or for the benefit of his estate, is property which is deemed to be property of the deceased.
- APPLICATION OF SECTION 3(3)(d) OF THE ACT
- Under certain circumstances, where Section 3(3)(d) of the Act can be applied, assets which are not the property of the deceased may be subject to estate duty. Section 3(3)(d) should b;e read with Section 3(5) of the Act, which states:
(5) For purposes of paragraph (d) of subsection (3) –
(a) the term “property” shall be deemed to include the profits of any property;
(b) a person shall be deemed to have been competent to dispose of any property –
(i) if he had such power as would have enabled him, if he were sui juris, to appropriate or dispose of such property as he saw fit whether exercisable by will, power of appointment or in any other manner;
(ii) if under any deed of donation, settlement, trust, or other disposition made by him he retained the power to revoke or vary the provisions thereof relating to such property;
(c) the power to appropriate, dispose, revoke or vary contemplated in paragraph (b) shall be deemed to exist if the deceased could have obtained such power directly or indirectly by the exercise, either with or without notice, of power exercisable by him or with his consent;
(d) the expression “property of which the deceased was immediately prior to his death competent to dispose” shall not include the share of a spouse of a deceased in any property held in community of property between the deceased and such spouse immediately prior to his death.
- Both requirements, of competency to dispose as well as disposal for his own benefit or the benefit of his estate, must be present in order for Section 3(3)(d) to apply.
- CONSEQUENCES OF SECTION 3(3)(d) OF THE ESTATE DUTY ACT
- Section 3(3)(d) of the Act endeavours to limit estate duty avoidance by taxing individuals after their death where they are trustees of a trust and have intended to limit their estate duty on certain property while still enjoying such property and retaining full powers relating to the disposal thereof. Although we have not found a particular instance where SARS has applied Section 3(3)(d) successfully as yet, it remains a risk which should be guarded against.
- If SARS was able to successfully apply Section 3(3)(d) of the Act to the assets of a trust as a result of the testamentary reservation, it would mean that the trust assets would be taxed as deemed property of the deceased for purposes of estate duty. This could have dire consequences for the estate, as provision was not made for these taxes and will negate some of the main reasons for setting up the trust.
- If your trust deed contains a testamentary reservation, we would advise that you strongly consider amending your trust deed to ensure that it cannot fall within the ambit of Section 3(3)(d) of the Act. Please contact our offices for assistance herewith.
Should you further be uncertain about your estate planning, please feel free to contact our office to consult with one of our experienced fiduciary specialists.
LLB; LLM (Estate Planning)
Fiduciary and Commercial Department
Phone: 012 361 9823