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DON’T LET A CARELESS ESTATE PLAN UNDO A LIFETIME OF SAVING

by | Apr 1, 2022

Many South Africans are taking the opportunity to review their savings habits and behaviors. One aspect that’s often overlooked is that your hard-earned savings gains can easily be undone by failing to pay sufficient attention to estate planning.

Even if all your retirement goals fall into place as planned, the benefits can be easily undone through a careless estate plan. An incorrectly worded Will or incorrectly used estate planning structure may result in a substantial portion of your lifetime savings going towards paying death duties and capital gains tax.

Although you may have not given it much thought, here are some guidelines to keep your estate plan on track.

  1. Avoid overly complex structures – A simple but properly drafted will is usually sufficient to ensure a speedy and cost-efficient transfer of assets to your heirs. Local and foreign trusts and companies can also be set up to house assets and make use of the benefits associated with these structures. Be aware, however, of the associated cost of maintaining them in foreign jurisdictions. It is important to remember that these asset vehicles should be used in order to provide longevity of the assets and allowing for an easy way for assets to pass from generation to generation, as opposed to being used for tax efficiency, as you may find yourself, or the intended beneficiaries, may land up paying far more in taxes down the line.
  1. Use tax concessions to your advantage – Both the Estate Duty Act and the Income Tax Act offer opportunities for relief. The Estate Duty Act contains a number of sections that can save or postpone the payment of estate duty if used correctly in a carefully drafted will:
    • Section 4A provides that the first R3.5m of a deceased person’s estate is not subject to the payment of estate duty at the current rate of 20%.
    • The value of any bequest to a surviving spouse is not subject to estate duty, but rather “rolls over”.
    • Charitable bequests are deducted from the dutiable estate.

Paragraph 80(2) of the Eighth Schedule to the Income Tax Act, as well as section 7C of the Act, can also be used to your advantage:

    • Trustees can award the gains in a trust to the beneficiaries of the trust, to ensure that the capital gains are taxed at the lower inclusion rates applicable to natural persons. The effective rate of capital gains tax for trusts is 36% compared to the maximum effective rate of 18% for individuals.
    • Much has been written about the effect of section 7C of the Income Tax Act, which was introduced on March 1, 2017. Any distributions by trustees to beneficiaries should firstly be used to reduce any loan accounts owed to the individual.
  1. Artificially creating an insolvent estate can have unintended consequences – Unfortunately, some practitioners think that estate duty can be avoided on death by artificially creating an insolvent estate. This is normally done by the individual making loans from a trust to the extent that his liabilities (that is, the loan owed to the trust) exceed the assets in his estate on death. However, be careful what you wish for. Unsuspecting trustees can be held personally liable by the beneficiaries if unsecured loans are not recoverable and losses are incurred in the trust.
  1. Choose your executor carefully – Choosing the executor of your estate with care could result in substantial tax savings in the estate administration process. Selling estate assets during this process can result in a recoupment of tax if the deceased claimed a depreciation allowance on these assets.
  2. Consider assurance products which cover certain deathbed expenses – Certain institutions do offer funeral cover, and additional levels of cover which indemnify against Executor fees, conveyancing fees, and in certain circumstances, cover against estate duty and Capital Gains Tax. We do partner with Capital Legacy when drafting the Last Will & Testament for our clients, and more recently they have introduced their Legacy Protection Plans, where absolutely everybody can have certain levels of cover, regardless of your age or medical circumstances. This is extremely refreshing as many insurers will repudiate insurance cover due to age and medical reasons.

Through having the correct assurances in place, it will ensure that your beneficiaries inheritance is not eroded by unplanned deathbed expenses, and ultimately your assets are received according to your last wishes.

It is vitally important to have adequate knowledge about estate planning and how to plan for a care-free tomorrow. Make sure you give careful thought to the tax implications associated with savings and investments, and discuss it with your Financial Advisor in order to ensure you don’t waste the benefit of all your disciplined savings over the years.

Should you require any assistance with any of the above, or would like additional information, please do not hesitate to contact us and we will be happy to provide the necessary information.