Estate planning is an uncomfortable step in wealth management for many South Africans, but it is necessary to understand the taxes and costs associated with it.
This is according to Nedbank, which said that estate planning is essential for those who want to pass their wealth on to someone else.
The process is much more than just drafting a will, with managing assets to optimise the various taxes applicable in the estate seen as just as necessary.
These include estate duty, capital gains tax (CGT), and donations tax, as well as several other legal processes that govern the winding up of an estate, which a master of the High Court oversees.
In simpler terms, one’s estate is all the assets and liabilities that one leaves behind when they pass away.
This includes all real estate and property, bank accounts, investments, your personal belongings of value, such as vehicles, art, collections, and jewellery, as well as liabilities like loans or other debts.
When you pass away, your estate becomes a separate legal entity, which is responsible for settling debts and distributing the remaining assets to your rightful heirs.
Estate duty is then calculated according to the taxable value of a deceased estate, also known as the dutiable value. That said, estate duty applies only to estates above certain value thresholds.
There is a primary rebate on the first R3.5 million of a deceased estate’s dutiable value, meaning that the first R3.5 million is exempt from estate duty.
Nedbank stated that estates worth more than R3.5 million are subject to estate duty only on the value exceeding that threshold.
Estate duty is currently levied at 20% on the first R30 million of an estate’s dutiable value, and at 25% on any amount above R30 million.
When you die, your estate becomes a separate taxpayer, with your assets being transferred from your current tax number to a new “Estate late” tax number. A CGT liability arises in their tax return.
“This is because when an individual passes away, their assets are considered to have been disposed of to the Estate late at market value on the date of death, triggering a CGT liability in the name of the deceased.”
The estate could also be liable for CGT if it takes a long time to wind up, as the market value of the asset may change between the time the estate gets the asset and when it is finally distributed to the heir.
The estate could also be liable for CGT if it takes a long time to wind up, because the market value of the asset may change between the time the estate gets the asset and when it is finally distributed to the heir.
If the estate cannot pay the CGT on an asset you inherit, you will have to pay it. If you later sell the asset, you will be liable for CGT if the asset has increased in value.
How to avoid estate taxes
Nedbank noted that exemptions for spouses are a key feature of South African estate duty law. If you leave your assets to your spouse, no estate duty is paid on those assets at your death.
Additionally, when a deceased person has a predeceased spouse, the estate duty rebate doubles from R3.5 million to R7 million, less any amount used by the predeceased spouse’s estate.
Retirement funds, including pension, provident, preservation, and retirement annuity funds, also do not fall into a deceased estate if these funds have nominated beneficiaries or dependents.
The funds are paid directly to the beneficiaries and are exempt from estate duty. That said, the trustees of the retirement fund have final say regarding distribution among financial dependents.
In addition, if a living annuity has a nominated beneficiary, the proceeds do not pass to the deceased’s estate and are not subject to estate duty; instead, funds are paid directly to the chosen individuals.
If a policyholder passes away, the proceeds of the living annuity are distributed immediately to the beneficiaries, thereby bypassing the winding-up process.
This circumvents the deceased’s estate and avoids estate duty. Unlike retirement funds, anyone can be nominated as a beneficiary of a living annuity, without the requirement of financial dependence.
Funeral and administration costs are also deductible from the estate before estate duty is calculated, which includes expenses associated with the funeral service, the gravestone, and certain fees.
Any debt owed at the time of death, including a bond or personal loans, is deducted from the value of the estate before estate duty is calculated.
Bequests to registered charities or public benefit organisations may be exempt from estate duty, subject to the conditions set by SARS.
Life insurance policies can also be a way to avoid estate duty, which can be done by paying the proceeds to the surviving spouse.
If a domestic life policy is registered under an antenuptial or postnuptial contract and the spouse or child is nominated a beneficiary, the proceeds do not form part of the deceased’s dutiable estate.
