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When estate duty claims up to a quarter of an estate, families may be left with less than expected. You can help your clients minimise estate duty with careful planning to ensure wealth is transferred to future generations, not to the tax office.
Key facts about estate duty
Estate duty in South Africa is levied on the “dutiable amount” of the estate at:
- 20% of the first R30 million and
- 25% of the asset value above R30 million
after taking a R3.5 million abatement into account, or a R7 million abatement for spouses.
The dutiable amount includes all property of the deceased, which includes “anything that can be disposed of and turned into money”.
Estate duty not only reduces inheritances but may also result in estate assets being sold to raise cash for the tax bill and other estate costs. According to the Fiduciary Institute of South Africa, more than 30% of estates in South Africa don’t have enough cash to pay taxes, debts, fees and other estate costs.
How to minimise estate duty
Planning ahead to minimise estate duty, making full use of exclusions and tax-efficient vehicles, is critical to ensure hard-earned money and assets remain with families and beneficiaries for future generations. Allowable deductions for certain expenses in determining the dutiable amount include:
- Certain estate administration costs such as valuation and accounting fees
- Certain burial costs such as deathbed and tombstone costs
- Debts owed by the deceased and/or estate
- Accrual claims under the Matrimonial Property Act
The Estate Duty Act also allows for specific exemptions clients can make use to reduce estate duty due, the most significant of which are detailed below.
Life cover policies with a spouse as beneficiary
If a spouse is named as beneficiary on a life cover policy, the proceeds do not form part of the estate. If a child is named as beneficiary, the proceeds, as well as certain key-person policy pay-outs, may also be excluded from the dutiable amount.
Formal retirement savings products
Retirement funds such as approved pension and provident funds and retirement annuities (RAs) do not form part of an estate’s property for estate duty purposes. On death, the money in these can be paid to a beneficiary and used for their future expenses or to build further wealth.
RAs and formal retirement savings can get a bad rap for being inflexible, costly and inaccessible. But they are tax-efficient investments before and after death. They still need to be tailored to an individual’s financial needs and plan, but they can be used to lower the taxes after death.
For example, if an estate had property worth R5 million, of which R1 million was in an RA, the dutiable amount is R500 000 (R5m less R1m less R3.5m). Estate duty at 20% would be R100 000. If the full R5 million was dutiable, estate duty would be R300 000.
Spousal exclusions on property
The Estate Duty Act allows for the exclusion of property left to a spouse when determining the dutiable amount. Although, on the death of the surviving spouse who inherited the property, estate duty will be levied on their assets, effectively deferring the tax to this date. However, for surviving spouses this exclusion can be the difference between financial struggle and financial comfort.
In addition, the surviving spouse can also plan ahead to minimise the tax liability on their death. Estates can be structured to use the full R7 million abatement (R3.5 million for each spouse) where it is most beneficial, such as on the first estate in full.
Exempt donations
Donations tax is 20% with a R100 000 annual exemption. Donations between spouses are exempt, but clients with the available cash can donate up to R100 000 each year to a child, other family member or an approved charitable institution. Over time, this moves assets out of an estate and into the hands of beneficiaries. If your clients don’t need these funds for expenses or investment purposes, annual donations can be part of their estate plan.
Bequests to tax-exempt entities such as PBOs are also excluded from estate duty and clients who wish to leave funds to these organisations can reduce estate duty tax.
For example, if a 50-year-old client donates R50 000 to each of their two children annually, in 15 years each child has assets to the value of R750 000, and the value of the estate for tax purposes is reduced by R1.5 million, saving potentially as much as R300 000 on estate duty.
Inter vivos trust
Property, including immovable assets such as houses, can be donated to an inter vivos trust set up in the clients’ lifetime with a fiduciary expert’s advice. This effectively removes these assets from the estate.
There are a few catches to be aware of when deciding if this is the most appropriate option for your client:
- The trustees, not the donor, will have full control of the trust’s assets
- Trustees will be paid for their services and must follow prescribed regulations and guidelines in the Trust Property Control Act when administering the trust
- The trust’s income is taxed, at a maximum rate of 45%
So the trust itself will incur costs and has a tax obligation that needs to be weighed up against the savings in estate duty. If this is in the interests of the client, they also need to be aware that they will no longer own the asset or have a say in using and managing it. Inter vivos trusts come with complexities but are always an option to consider to minimise estate duty.
The 1Life Wills & Estate Plan
Life cover policies can be taken out specifically to cover estate duty and the costs of winding up an estate, ensuring no assets have to be sold to pay these bills. The 1Life Wills and Estate Plan includes:
- A life cover pay-out to cover expenses associated with finalising an estate including fees and taxes.
- An income benefit that provides families with financial support for up to six months.
- Discounts on executor and conveyancing fees, to further reduce the costs of winding up an estate and transferring property to a beneficiary.
Estate planning is a journey
Over time, legislation and tax rules change, requiring ongoing reviews to ensure the estate plan still meets the client's needs and is appropriate for their assets. Planning ahead allows clients to minimise taxes and costs, maximise inheritances and transfer wealth to future generations.