ESTATE PLANNING IN SOUTH AFRICA
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An estate plan needs to be carefully tailored to meet the individual objectives of
the estate planner. It is important that his or her needs and particular circumstances
are individually determined and subsequently taken into account.
1. THE B ASICS
As at the 1st March 2013 the relevant rates of tax were as follows:
Estate Duty – Estate duty is payable at the rate of 20% (i.e. at the same rate as
donations tax) of the net value of assets in the estate in excess of the sum of
R3 500 000. No estate duty is payable on assets bequeathed to a surviving spouse.
If the estate of a spouse does not utilise the whole of the abatement of R3 500 000,
the estate of the last dying spouse may have the benefit of any unused portion of the
abatement. Spouses therefore have a combined abatement of R7 000 000.
Capital Gains - A capital gain in a trust or company is taxed at the rate of
26.7% or 18.6% respectively, as opposed to a maximum of 13.3% in the hands of a
natural person. For capital gains tax purposes, on death one’s assets are deemed to
have been disposed of for an amount equal to the market value of those assets at
the date of death. The capital gain is taxed to the extent that it exceeds R300 000,
subject to the proviso that assets transferred to a surviving spouse are treated as
having been disposed of for an amount equal to the base cost of the assets. This
effectively defers the capital gain and hence the payment of the tax until the death of
the surviving spouse.
In the case of a natural person capital gains in any tax year up to a maximum of
R30 000 are free of tax. The first R1.8m capital gain arising from the sale of a small
business by an individual who is at least 55 years of age will be excluded from tax.
Primary Residence – If a home is registered in the name of an individual, on the
sale of the property the first R2 000 000 of any capital gain will be exempt from
capital gains tax. There is an automatic exclusion if the property is sold for less than
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R2 000 000. This exemption does not apply if the property is owned by a legal entity.
There may be instances however when it might be preferable to acquire a home
through a trust.
Donations
-
Donations between spouses are free of donations tax. Other
donations of up to R100 000 a year are also free of donations tax; amounts in excess
of R100 000 a year attract tax at the rate of 20% in the hands of the donor.
Trusts - Trusts pay income tax at a flat rate of 40%. For tax purposes, the
‘conduit principle’ applies to income and capital gains. In terms of this principle
income and capital gains passed on by a trust to a beneficiary in the same year of
assessment as the income or gains accrue to the trust, is taxed in the hands of the
beneficiary and not in the hands of the trust.
2. THE USE OF TRUSTS
A principal object of an estate plan is to reduce or eliminate estate duty by “freezing”
the value of an estate. A convenient means of achieving this objective is for the
estate planner to transfer investments which are likely to increase in value over time
into a trust created for the benefit of his beneficiaries. The following points relate to
trusts created under South African law.
1. A trust is brought into existence as a result of a contract between a donor and the
trustees.
The beneficiaries of a trust are designated in a deed of trust.
A
distinction is made between income beneficiaries and capital beneficiaries. The
estate planner may be a trustee but if the estate planner is a beneficiary as well, it
will be necessary to appoint at least one independent trustee.
The powers
accorded to the trustees in the trust deed should be such to enable the trustees
to take full advantage of the tax planning opportunities afforded by a trust.
Usually the principal beneficiaries of the trust would be the descendants of the
estate planner, including or excluding spouses.
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2. Under normal circumstances the estate planner will wish to avoid the payment of
donations tax. He will therefore donate only a nominal sum to the trust. The
estate planner will lend money to the trust to enable it to purchase assets or,
alternatively, the estate planner will sell assets to the trust. The purchase price
will be a debt owing by the trust to the estate planner on loan account.
Depending upon the requirements of the estate planner the loan may be free of
interest or it may attract interest. If interest is charged the rate of interest should
not exceed a market related rate.
3. The trust deed should contain a stipulation that the trustees can lend money to
the beneficiaries, including the estate planner, with or without interest.
4. The estate planner may be both an income and a capital beneficiary. In some
cases, the estate planner and his or her spouse will be income beneficiaries only.
If the estate planner and/or his spouse are to be capital beneficiary, two
independent trustees should be appointed to achieve a divestment of control of
the assets in the trust.
5. The loan account of the estate planner in the trust will be reduced over time by
payments made to the estate planner by the trustees. Upon the estate planner’s
death the growth which will have taken place in the value of the assets held by
the trust will not attract estate duty. There will also be no taxable capital gain if
the assets in the trust are not realised.
6. There can be a saving in income tax if taxable income of the trust is distributed
amongst beneficiaries who have little or no other sources of taxable income such
as grandchildren or a spouse who is a housewife.
Income distributed to a
beneficiary may be lent back to the trust and credited to a loan account. If the
exemption on interest is included, the current thresholds below which no income
tax is payable are R94 503 per annum for persons under the age of 65 years and
R157 850 per annum for persons between the ages of 65 and 75 years, and
R144 700 for persons over 75 years of age. Any income distributed over and
above these amounts up to the sum of R174 550 will attract income tax at the
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rate of 18% only. The trustees should avoid distributing income to the estate
planner’s minor children as income distributed to those children will attract
income tax in the hands of the estate planner. Income may be distributed to
those of the estate planner’s children who have attained their majority,
grandchildren and charitable, educational or religious institutions if they are
included as beneficiaries.
7. The estate planner should not release the trust from liability for any debt owed to
him. The reason for this is that the release of the trust from such liability will give
rise to a taxable capital gain. It is preferable to donate a sum of money to the
trust to enable the trust to make a payment in reduction of the estate planner’s
loan account.
8. The transfer of assets to a trust does not mean the estate planner is no longer
possessed of assets. The estate planner is a creditor of the trust by virtue of
holding a loan account in the trust which will be an asset in the estate of the
estate planner. It is unwise to bequeath the loan account to the trust as the
bequest will give rise to a liability for tax on a capital gain equal to the amount of
the loan at a rate of 26.7%. The loan account should rather be bequeathed to the
estate planner’s heirs.
Alternatively an unrelated sum of money can be
bequeathed to the trust to enable the trust to repay the loan account.
9. If a trust disposes of assets and makes a capital gain, the trustees may, subject
to certain anti-avoidance rules, award the capital gain to capital beneficiaries to
enable the gain to be taxed in the hands of the beneficiaries at a rate of up to
13.3% (as opposed to 26.7% in the hands of the trust). The beneficiaries can
lend the proceeds back to the trust to provide for continued investment by the
trust.
10. Caution should be exercised if a beneficiary of a trust is a non-resident for tax
purposes. Income credited or paid to such a beneficiary may need to be included
in the world-wide income of the non-resident beneficiary. If a capital gain in a
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trust is awarded to a non-resident beneficiary, the trust will remain liable for the
payment of income tax on the capital gain.
11. The vesting of an asset in a beneficiary will give rise to capital gains tax in the
hands of that beneficiary. The distribution of cash to a capital beneficiary either
during the existence of the trust or on termination of the trust will not give rise to
the payment of tax as the tax would have been paid on disposal of the assets by
the trust.
3. LIFE POLICI ES AND ESTATE PL ANNI NG
RETIREMENT ANNUITIES:
As a result of certain amendments relating to the taxability of death benefits from a
Retirement Annuity (RA), an RA can be used as an effective estate planning tool.
The estate planning rules applicable to an RA are as follows:

Estate duty: Payouts from an RA on death of the policy holder are free of Estate
Duty. They will also not be subject to executors fees in the deceased estate.
It must be remembered that the distribution of proceeds from an RA is subject to
the discretion of the trustees of the retirement fund and your nominated
beneficiary will not automatically receive the benefit, as dependants receive
preference under current legislation. If you have dependants and you nominated
beneficiaries who are not dependants, the Trustees will use their discretion to
decide who must receive the benefit.
If you have no dependents and you have nominated beneficiaries who are not
dependants, the trustees must establish if your estate has enough money to pay
your debts. If there is not enough money in your estate to pay your debts, the
trustees must first use the benefit to pay the debts of your estate. Only once all
the debts of your estate have been paid, will a payment be made to your
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beneficiary. If you have no dependants and have not nominated Beneficiaries, a
lump sum payment will be made to your estate.

Taxation: On the death of the owner the beneficiaries have the option either to
take an annuity income (taxed at their marginal rate) or take a lump sum which
will be taxed at published rates in the hands of the deceased estate i.e. treated as
if the person had made a withdrawal the day before he died.
Lump sum payments on death are subject to the normal taxation rules on
retirement funds as per the following table. The table is cumulative over the
lifetime of the taxpayer. Contributions by a deceased taxpayer to an RA which did
not rank as a deduction against the deceased taxpayer’s income will qualify as a
deduction in the hands of the beneficiary.
Taxable portion of lump sum
Rates of tax
Not exceeding R500 000
0%
R500 001 – R700 000
18% of the amount over R500 000
R700 001 – R1 050 000
R36 000 + 27% of the amount over R700 000
R1 050 001 +
R130 500 + 36% of the amount over R1050000
ENDOWMENT POLICIES
The policyholder may nominate beneficiaries for ownership of the benefits of the
endowment policy. Upon the death of the policyholder the proceeds are paid directly
to the nominated beneficiary by the life insurer and hence bypass the executor of the
estate. Therefore executor’s fees (of up to 3.5% plus VAT) on the proceeds will be
saved. However, the proceeds will form part of the estate and will be subject to
Estate Duty.
Disclaimer: : This document is intended for guidance only and is subject to change without notice. Whilst the
information contained herein is believed to be accurate at the time of writing, it not be accurate at the time of reading.
It should therefore not be relied upon as the sole basis for any decision without first verifying the accuracy of the
information. Dependence on this information will be at the risk of the individual and be without recourse to Asset
Protection International (SA) Pty Ltd or any of its employees or agents.
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