Everyone has a right to reduce the amount they pay in tax through the proper channels. This applies to estate duty too. Ask spouses and life partners the question: “In the event of your death who will inherit?” Almost always, the answer will simply be: “We have left everything to each other”. Sounds easy enough, but how much does it cost?
The truth is that in terms of Section 4(q) of the Estate Duty Act (the deduction of bequests from a spouse), spouses inheriting from each other do not avoid estate duty, but only defer payment until the death of the second spouse.
How to value your estate
The value of your estate must include all your assets like group life insurance cover; after tax lump sum payments from provident funds and retirement funds; and proceeds from life policies, irrespective of whether they have been paid directly to a beneficiary by the insurer or not.
But there is a way to protect your children from having to pay estate duties. Say the total value of a spouse’s estate at the time of their death is R4 million. The surviving spouse owns the house worth R1 million and inherits the deceased spouse’s estate. In this instance, no estate duty is payable because Section 4(q) applies.
Some years later the remaining spouse dies. The children inherit R5 million and, after the Section 4A abatement (R2,5 million), pay estate duty of 20% on the balance, which is equal to R500 000 (this is low compared to the worldwide average of between 35% to 45%). Had the spouse who died first left R2,5 million to a discretionary trust where the surviving spouse could be catered for as an income beneficiary, then R2,5 million would have been exempt from the estate under Section 4A. The surviving spouse would have received the balance of R1,5 million and on their death the total value of the estate would now be R2,5 million. On the death of that spouse, R2,5 million would be deducted from the estate, thus leaving the estate duty at nil. This would have saved the family R500 000.
Planning is vital
With estate values doubling every eight years at 9% growth, it will not take long for those with smaller assets to find themselves caught in the estate duty trap; planning should therefore be done before you accumulate large assets.
Consider estate freezing techniques to limit your estate duty. Assuming life expectancy is 30 years and that asset value doubles every 10 years, then R1 million will grow to R8 million in this period. If the duty is 30%, families will end up paying R2,4 million. Why not plan to minimise your ultimate payment? The use of trusts to hold growth assets could be a method to reduce this amount in the future.
In planning your estate the will plays an important part in determining estate tax and winding up costs. If assets have either been sold or grown in a trust the growth will be excluded from the estate duty calculation. The remaining assets left to spouses and children will incur costs paid to the appointed executor who winds up the estate. Current fees are 3,5% plus VAT. If 75% of the assets are in a trust and only 25% in the deceased’s name, there is a further saving on executor fees. If spouses or children over the age of 21 are appointed as executors they can negotiate with a bank or accountant a lower fee to wind up the estate if they cannot do it themselves.