A taxpayer is a trustee and beneficiary of a trust and dies with a debt to that trust of R2.5 million. The deceased’s estate (ignoring the debt to the trust) amounts to R500 000 and this is paid to the trust in the course of the winding up of the estate, leaving an irrecoverable shortfall of R2 million on the debt. What are the tax consequences (and timing thereof) for the deceased, the post-death deceased estate & the trust where an individual (connected person to the trust) dies with a debt to a trust and the estate is insufficient to satisfy the debt?
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
We can point you to the relevant legislation and you can then request assistance if you require guidance with respect to the interpretation and application of specific provisions. The first point is that this appears to be an ‘insolvent deceased estate’. Under section 34(1), of the Administration of Estates Act, 1965, if the executor found “the estate to be insolvent then or any time before distribution under subsection (12) of section 35, he (or she) shall forthwith by notice in writing (a copy of which he shall lodge with the Master) report the position of the estate to the creditors, informing them that unless the majority in number and value of all the creditors instruct him in writing within a period specified in the notice (not being less than fourteen days) to surrender the estate under the Insolvency Act, 1936 (Act No. 24 of 1936), he will proceed to realize the assets in the estate in accordance with the provisions of subsection (2).” Paragraph 12A, of the Eighth Schedule to, and section 19 of the Income Tax Act deals with a ‘debt benefit’ arising, but that is relevant to the trust and doesn’t apply to the deceased or the estate of the deceased. For the deceased, paragraph 56 will apply – we say that because you indicated that the ‘individual (connected person to the trust)’, but you should refer to the relevant interpretation note to confirm if the deceased estate is a connected person in relation to the trust.