March 8, 2013 admin

Trusty Tax Savings


Life assurance is a popular and valuable way to ensure that in the event of the death of a breadwinner, the surviving family have sufficient capital to settle debt and replace the deceased breadwinner’s income.

A life assurance  policy allows the policyholder to specify one  or more  beneficiaries, who will receive the  policy proceeds  on  the  death  of the policyholder. It is not  uncommon  for a married policyholder to  nominate his or  her  spouse  as beneficiary. This is usually  done  with the  intention that the surviving spouse will then invest the policy proceeds  to generate  sufficient income to meet  the ongoing financial needs of the survivor and their children.
Normally the  payment  of the  proceeds  of a life policy  is tax-free;  the  same  will not  necessarily apply to the subsequent income and capital gains earned  on the  investments made  with the  proceeds.
One  of  the  drawbacks  of  having the  surviving spouse  receive  and  then  invest the  policy proceeds  is that  from then  on any taxable income earned on the invested proceeds (e.g. interest or rentals) and any subsequent taxable capital gains made from the invested proceeds (e.g. selling of shares or unit trusts) by the surviving spouse are taxed in the survivor’s hands. This will be the case even though the survivor is likely to be applying a large portion  of the  income earned  on invested assets towards the accommodation, food, schooling and other  needs  of the  couple’s minor children.  The payment  by a taxpayer  of his or her children’s maintenance  expenses is simply not tax deductible from the parent’s income.
A more tax efficient option to consider is for the policyholder to leave some or all of the proceeds to a trust. Such a trust could be either a trust set up by the policyholder is his or her will (called a testamentary or Will trust) or a trust created in a trust deed during the lifetime of the policyholder (called an inter vivos trust).

Trust income is taxed on a “conduit principle” i.e. if taxable income earned by a trust is awarded by the  trustees  to a beneficiary, then  it retains  its identity (e.g. as interest or rentals) and  if it is awarded  in the same tax year then it is taxed in the hands of the beneficiary and not in the hands of the trust. For example, a trust beneficiary who receives interest from  a  trust  will  be  liable to declare the  interest earned  but  may claim the annual tax free exempt portion on interest avail- able to all taxpayers.
A trust structure thus provides an opportunity for the tax burden on taxable income earned  by the trust  to  be  split amongst  the  surviving spouse and children. Bear in mind that as young children are unlikely to be earning any other  income, at current  2012/13 tax thresholds each child could to awarded up to R63,556 in taxable income without being liable to pay any income tax.

By incorporating a trust into an estate  plan, one may be able to leave behind a more tax efficient structure,  resulting in a greater  net  income for loved ones. However, trust laws are complex and it is recommended that one seeks specialised financial and legal advice whenever a trust structure is considered in one’s estate  planning.

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