Using Interest Free Loans as part of an Estate plan

using-interest-free-loansIntroduction

Donating or selling assets to trusts or companies in exchange for interest-free loans, payable on demand, is a popular estate planning tool. The most common scenario is where the parent of a minor child sets up a trust for the child and sells immoveable property to the trust in exchange for an interest-free loan. The benefit to the parent is that the immoveable property no longer forms part of his or her estate and, therefore, estate duty cannot be levied on the property upon his or her death.

In addition, donations tax is not levied as the property was sold and not donated. Depending on the circumstances, any income from the property will usually accrue to the beneficiaries of the trust or the trustees. While this sounds like a good idea for a person who has substantial assets, caution should be exercised in light of the judgment in CSARS v Woulidge 2002 (1) SA 68 (SCA) and the provisions of section 7 of the Income Tax Act 58 of 1962.

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