Financial Planning Must Always Include Continuous Estate Planning

by | Apr 3, 2018

Although it is important to ensure you are invested in investment vehicles which are tax efficient, it is equally important to ensure your investment planning takes into account estate planning to ensure that you have made sufficient provision to minimize estate taxes, and maximise the benefits your heirs will receive.


Ensure beneficiaries are nominated within investment products


In the February 2018 budget speech, it was announced that estate duty will be increased through a “step-up” approach, meaning the estate duty rate for the first R30 million in an individual’s estate will remain as is and be taxed at 20%, but anything above R30 million, will now be taxed at an increased estate duty rate of 25%. Although we know that pre-retirement and post-retirement products do not form part of an individual’s estate, this is only the case if a beneficiary is nominated within the product. If no beneficiary is nominated, the investment will be paid to the Estate of the deceased, it will be included for estate duty purposes, and distributed according to the last Will and Testament, or interstate if no Will has been drafted. Although estate duty is payable on endowments, if a beneficiary is nominated within the product, as is the case for retirement products, it will pay directly to the nominated beneficiary ensuring no executor fees are payable, and the funds are paid to the beneficiary/ies far quicker than if it has to be wound up in the estate.


Make use of allowed annual donations tax exemptions


As per current legislation, donations tax is payable at a rate of 20%, however there is no donations tax payable between spouses no matter what the value, and a maximum of R100,000 per annum can be donated per individual to persons other than their spouse collectively without incurring donations tax. If a person is in the position where they are able to make financial donations in their living years to those they want to inherit, this is a great way to legally avoid unnecessary estate duty, taxes and executor fees.


Estate Duty abatement at death


Every individual’s estate receives a R3.5 million abatement, meaning the first R3.5 million in estate dutiable assets are excluded for estate duty purposes. Although this is not necessarily a tool which can be used effectively in our living years, it is important for person’s who have lost their spouses to know that this abatement, or at least the portion which was not used in the winding up of their spouses’ estate, can be used in conjunction with their own abatement of R3.5 million. Eg. If a husband passes away, and is survived by his wife, and his estate is only worth R2 million, he will only be able to use R2 million of the R3.5 million abatement. However, when his wife passes away, she will have her own R3.5 million abatement, as well as the additional R1.5 million abatement which was not used by her husband, giving her a total abatement of R5 million when she passes away.

There is much talk about this “rolling-over” of the abatement, and the Davis tax committee has recommended increasing each individual’s rand value abatement going forward, and not allowing any unused abatement to roll-over to their surviving spouse in the future. It is expected that this will have little impact on most individuals as it is expected that the abatement will increase significantly, but it will rather have an impact on the high net worth individuals, in an attempt to treat it as part of a possible wealth tax.


Ensuring your family is looked after


If you want to ensure that your family is well looked after when you are no longer around to look after them, and your financial assets are not sufficient, or if you want to ensure your family is able to retain physical assets as opposed to having to sell them to cover estate duty, outstanding debt, or taxes, it is recommended that you put in place life assurance, which can be ceded to the estate, which is sufficient to cover the above mentioned expenses, with any surplus funds remaining being inherited by the heir who is to inherit the residue of the estate. As a person grows older, they enter different life stages and they may have accumulated sufficient financial assets, the life assurance values can be re-evaluated and earmarked for alternative means or cancelled entirely and the premiums redirected into investment products.


At the end of the day, we know we cannot completely escape paying tax, but we can make use of the tools provided to us to ensure we minimize the tax we do pay.