Although they say nothing is certain in this world, except death and taxes, it is even worse when we think about having to pay taxes simply for dying, in other words, paying Estate Duty with our hard-earned money as opposed to it going to our nominated beneficiaries. For this reason, it is extremely important to chat to your Private Wealth Manager to ensure that your investment portfolio is well positioned to minimize estate duty, but please do be careful of the many “traps” people find themselves in by trying to outsmart the tax man.
Although SARS want to ensure they do get their piece of the pie, according to current tax laws, every person’s estate does have a R3.5 million abatement, meaning that the first R3.5 million of assets which would normally attract estate duty, will be excluded for estate duty purposes.
- A mistake many people make is assuming that because retirement products do not form part of the estate, as long as a beneficiary is nominated, that there will be no tax implications. Yes, no estate duty will be payable, but income tax or lump sum withdrawal tax could be payable, and at a rate higher than estate duty. Let me explain the 3 different options available to the beneficiaries who do inherit retirement products, and I will expand on each:
- Take the full lump sum in cash – If the full lump sum is taken in cash, the lump sum will be taxed in the hands of the deceased, according to the retirement tax tables at that time, but will take into account the lump sum values withdrawn from retirement products by the deceased in their lifetime. The tax table is currently as follows:
| Lump sum value | Tax payable |
| R0 – R500,000 | Nil |
| R500,001 – R700,000 | 18% |
| R700,001 – R1,050,000 | R36,000 + 27% on the value over R700,000 |
| R1,050,001 and up | R130,000 + 36% on the value over R1,050,000 |
As you can see, as long as the value the deceased withdrew in his lifetime, plus the value the beneficiary receives in cash does not exceed R500,000, then there will be no tax payable, but any values over the R500,000 will be taxed on a sliding scale of between 18% to 36%, which could result in a far higher tax payable, than the 20% payable in estate duty.
- Transfer the investment into the name of the beneficiary – This will result in a transfer into the name of the beneficiary with no tax payable whatsoever. However, when you do need to access the funds in the form of a retirement lump sum from a Retirement Annuity, or as an income payable from a Living Annuity, please remember that for the lump sum, the above table will again apply in the hands of the beneficiary, and for the income received, the individual will be taxed in their personal capacity according to the personal income tax tables.
- Withdraw a portion and transfer the remainder (a hybrid of 1 & 2 above). This may be the most cost-effective option, as long as you do know how much the deceased did withdraw as a lump sum from his retirement products in the past, as there may still be a tax-free portion available as a lump sum, or even a portion where only 18% in tax is payable, which is lower than 20% Estate Duty, and then it will be beneficial to withdraw this portion as it is taxed in the hands of the deceased, and transfer the rest to delay tax until a later date, but at least achieve growth within the retirement product without any Capital Gains tax being payable, as no Capital Gains tax is payable within retirement products.
- Another mistake commonly made is people purchase additional immovable property, thinking that when they pass away, the property will simply pass to the beneficiary/ies with no tax implications. Unfortunately, this is not the case. Immovable property does still attract Estate duty, and if it is not the person’s primary residence, it will also be included for full Capital Gains tax purposes. Over and above this, immovable property can be very costly to maintain, when considering upkeep for wear & tear, rates & taxes, levies, etc.
- Many people like to create a trust and hold their assets within this trust in order to avoid Estate Duty when they pass away, as a trust does not form part of the individual’s estate, as it is a legal entity in its own right. However, although estate duty is not payable, this may be negated by the high rate of capital gains tax which is payable within a trust when the assets do need to be accessed. Below is a comparative table on the taxes payable by an individual’s Estate versus a trust.
| Individual estate | Trust | |
| Estate duty payable | Yes | No |
| Capital Gains exclusion | First R300,000 in the estate | None – All included |
| Capital Gains inclusion rate | 40% of CGT | 80% of CGT |
| Tax rate payable | According to individual’s tax rate (18% – 45%) | 45% flat rate |
| Maximum Capital Gains tax rate | 18% | 36% |
Once again, you can see how it may not be in the beneficiaries best interest to hold assets within a trust, unless you want to create longevity for the asset, and intend for it to never be removed from the estate, but pass from generation to generation.
Please note: A Testamentary Trust created on the death of an individual for the benefit of minor children will be taxed as an individual and not as a trust, which is why it is highly recommended that provision is made for a testamentary trust for the benefit of minor children in every person’s last Will & Testament.
- When assets are bequeathed to a spouse, these assets “roll-over” to the spouse, meaning there will be no estate duty payable and the surviving spouse will take full ownership of the asset, as they were in the hands of the deceased, meaning that the asset’s cost value also passes to the surviving spouse for Capital Gains tax purposes, and the surviving spouse will be liable for all Capital Gains when they liquidate the asset, which the deceased would have been liable for if the assets were liquidated in the deceased’s hands. This ultimately does potentially result in estate duty and capital gains being avoided at that time, but it will become payable at a later stage.
Following on to this, spouses do often agree between themselves that although they bequeath their entire estate to each other, the surviving spouse is to “give” a portion to their children at that time, in a way to avoid Estate Duty. Although a very good idea in theory, SARS is always one step ahead, and anything which is “gifted” to anyone other than a spouse, will have to pay Donations Tax of 20% on all donations, with only the first R100,000 excluded for donations tax per year, accumulatively across all donations made. By doing this, they have actually just replaced Estate Duty of 20% with Donations Tax of 20%, but unknowingly may have actually lost out on making use of their R3.5 million abatement from estate duty, and possibly caused tax to become payable, when none may have been applicable should the estate assets have been bequeathed to persons other than their spouse and been below the abatement value.
Although it is very important to ensure estate planning is done, which will ensure your estate taxes are kept to a minimum, it is just as important to keep in mind what the alternative taxes payable may be. As they say, “the grass isn’t always greener on the other side”. If you want to ensure that your beneficiaries receive the full benefit of the assets bequeathed to them, or are worried that there may not be enough liquidity within your estate to cover all estate costs and taxes, such as estate duty, transfer fees, executor fees, etc., it is advised that a life assurance policy is put in place, payable to the estate, in order to cover estimated estate costs and taxes. Should this be something you would like to consider, please do let us know and we will calculate the estimated cover required, request quotes from a number of different insurers, and provide you with the quote which best suits your needs.
