Estate duty issue

[Basment Dweller]

Hi all,

I have a company that I founded.

I borrowed a large some of money (R4mil+) from my mother to buy 5 rental properties cash. My mother now holds an asset against the company, and the company has a liability loan account against my mother.

No formal agreement on the loan account has been set up but we have been paying our mother interest on her loan up to this point, no capital has been paid back yet.

The shareholding of the company is split 15% me, and 85% into a inter vivos trust whereby my mother is the donor and my brother and I are trustees.

I am the sole director of the company.

What happens to the loan when my mother dies with regards to estate duty?

I believe estate duty is calculated on 20% of any amounts over R3.5mil. Since the loan account is way more than 3.4mil we expect the estate duty to be quite sizable.

The advise we have received is that upon my mothers deat the loan account bequeaths back to the company and an estate duty will be due that the company will have to pay. Once the company pays the estate duty the loan is closed and all money is capitalised back to the company.

So if she dies tomorrow we will have to pony up some serious cash to SARS in order to settle the estate duty.

Is this correct?

[HR Solutions]

Interesting question this as I also have properties in a Trust, so will wait for answers.

[Basment Dweller]

Just to clarify the properties were registered in the company, the trust holds 85% of the shares.

[Andromeda]

Hi Basement Dweller

I'm not to sure about what you mean with this bit

The advise we have received is that upon my mothers deat the loan account bequeaths back to the company and an estate duty will be due that the company will have to pay.

however you should really have the loan committed to a written agreement and the agreement must plan for the likelihood that when your Mom passes away, there might well be a significant amount still owed. As matters stand (unless there are factors not mentioned) if your Mom were to pass away, the loan would most likely be called up by the executor. Potentially that is a far bigger problem than the duty, which in any event is to be paid by the estate, not the heirs.

Who are the beneficiaries of the trust, by the way?

[HR Solutions]

So in other words your mother is a donor to the company/trust ?
It should be laid down on a resolution what will happen in the case of death.

[Dave A]

The advise we have received is that upon my mothers deat the loan account bequeaths back to the company and an estate duty will be due that the company will have to pay.

It sounds a bit like you've been listening to the TREOC way - I have seen advices issued that present this way. However -

I don't believe this bequeathing is automatic. The idea must surely be that your mother would bequeath the asset (the unpaid portion of the loan) to the trust (or the company???) in her will.

The challenge is the estate duty would have to be paid out from the estate. Where would this cash come from?

[Basment Dweller]

Thanks for the input all, I'll try respond to everyones comments in one go:

- We consulted with a CFP, estate planning and trust specialist from Citadel Wealth Management, supposedly one of the biggest players in the wealth advisory industry. We paid a premium for him to set up the trust and the will for our mother. If he's not the right guy for this job then I don't know who is (definitely not those hobos from TREOC).

- Our mother funded the company on a loan to the company. She is now a creditor of the company.

- The beneficiaries of the trust are my brother and I

- I am the executor of my mother's estate

- The advise we got from the Citadel guy was that when she dies, her will will instruct the executor to bequeath (give back) the loan back to the company and any remaining assets bequethed to the trust, the company will no longer owe money to my mother's estate but will be liable for the estate duty i.e. 20% of any amount over 3.5mill.

- We were advised to spend the next few years either paying off the loan account or saving up the money for the estate duty.

- The company is currently a going concern and is in a good position to raise the funds required but if she dies tomorrow we might have an issue coming up with the money in order to wind up her estate.

- No loan account agreement has been reached yet, but we have already started paying it back to our mother, but no terms have been set

- The company has not declared a dividend yet, and will most likely never declare one until the loan account has been significantly reduced.

Funny enough I've been getting all kinds of conflicting advise from various professionals on this matter, i.e. CFP's, lawyers and accountants...and I'm not talking about around braai discussions, I'm talking about paid sit down advise from advisory professionals.

[Basment Dweller]

Here is the exact clause in our mother's will regarding the instruction on the loan account:

4.7.1 I specifically bequeath my credit loan account of Rxxxx in xxxx (Pty) Ltd, back to the company in terms of Section 12. A of the Eighth Schedule of the Income Tax Act. Should the loan have been reduced prior to my death, then the outstanding balance of the loan due to me is hereby bequeathed as above.

4.7.2 The proviso to this bequest specifically, is that the directors of xxxx (Pty) Ltd, immediately assume all responsibility for meeting my deceased estates liquidity and taxation obligations, from trust unds, and settle these obligations on my behalf. This has already been agreed to prior to my death.

[HR Solutions]

Just a question ...
Who are the Trustees ?
If your mother was a Trustee and yourselves (not only beneficiary) and the company is owned by the Trust , then surely this will uncomplicated things with loans if she had to die and estate wind up problems ? The Trust would not have to be wound up - it stays as the entity ?

[Basment Dweller]

Mother is the trust donor, trustees/beneficiaries are my brother and I. Our mother can't be a donor and trustee at the same time.

Its not the trust that will be wound up, its my mothers estate that will be wound up whereby her only significant asset is the loan account to the company.

[HR Solutions]

Our mother can't be a donor and trustee at the same time

I don't agree with this .......

[Justloadit]

Agree with HR, but I also see another problem, there is no independent Trustee!
The master of the court can see this as a family affair/business, and the Trust will lose all its protection.

[Basment Dweller]

Donors can't be trustees, thats how trusts work otherwise its simply an alter ego, its not a matter of whether you agree or not its simply how it works.

Regarding the independent trustee, we had one (a specialist CFP), but he resigned due to insurance issues with his new company and we have since not been able to replace him. We're trying our best here.

[EAB]

A donor can be a trustee. The issue arises when the donor is the only trustee.

[Basment Dweller]

Ok I might be mistaken about the trustee/donor issue.

Can we move back to the estate duty question?

So basically I'm just trying to verify the crux of this issue, if you die and a company owes you money in an unsecured loan and your will says the loan is to bequethed back to the company and the directors of that company are responsible for estate duty and other costs, is this a possible scenario or will there be another outcome?