If you own property, particularly two or three different properties, what is the best way to minimise tax and avoid difficulties in passing these on to your heirs, along with other assets, after your death?
Discussing this question at a Rawson Properties training session recently, Tony Clarke, MD of the Rawson group, pointed out that the major hurdle facing the surviving spouse or other heirs to an estate is that, as soon as the person dies, his or her accounts are frozen.
'Access to money then becomes impossible. In our group we have seen many cases of real hardship which could only be solved by borrowing money to pay for such basics as funeral costs, food, rates, electricity, petrol and school fees,' said Clarke.
The problem, he said, is exacerbated by insurance policies being paid into the estate. This is usually the case when the beneficiary shares a bank account with the deceased.
When executors have finally been appointed, the law requires that all outstanding debts owed by the deceased have to be settled first - and this can lead to one or more of the properties having to be sold in a hurry. After these sales capital gains tax will then have to be paid on the profit.
'The cost of winding up an estate,' added Clarke, 'can frequently amount to 30% of the total, excluding the debt repayments. Equally serious, it can take two or more years to reach full settlement and that is a long time to go without access to ready money'
Clarke said that in his experience the best way to circumvent these difficulties is for the bequeather to establish a trust before his death and to transfer the majority of his assets into this trust.
'The big advantages of a trust,' said Clarke, 'are that it is not frozen on the death of a spouse and, as it is entirely independent of the estate, is not subject to any estate duties. The surviving spouse, who is usually a trustee, can draw money as and when needed.
'Furthermore, insurance life policies paid into the trust can help to cover the trusts costs and, as the trust is not responsible for the deceased debts, there will usually be no need to sell off property and to pay Capital Gains Taxes incurred this way'
Are there, therefore, no disadvantages to the trust system?
Clarke said that by far the most common objections are that it will cost money, payable immediately, to establish a trust and the taxes incurred in transferring property into a trust are higher than those involved in passing it onto an individual.
'All my experience shows that establishing a trust is the best way to achieve a smooth handover of property and assets, especially if you expect some of them to be passed on to subsequent generations, e.g. children or grandchildren'
Clarke had a word of warning for those who are approached by so-called expert estate planners. Often, he said, these people are not as knowledgeable about estate law as they should be and their main goal is to sell expensive insurance policies.
'It is in my view far better to deal with an accountant or a lawyer who has specialised in these matters and who has kept up-to-date with all the legislation'
