Page 1 of 32
Notes on Estate and Financial Plans
Meyer on Case Studies
First Edition
Errol Gottfried Meyer
B. Juris, Education Diploma, Higher Diploma in Education, LLB,
Advance Certificate in Taxation, Certified Affiliate of Association of
Unit Trusts, Post Graduate Diploma in Financial Planning.
CFP®, Admitted Advocate of the High Court of South Africa, Master
Tax Practitioner (SA)™
1
[2]
Preface
Students that enrol for the Post Graduate Diploma in Financial Planning are required
to pass a Board examination to join the ranks of a Certified Financial Planner®
(CFP®). The Board examination requires a combination of theory and practical
application.
A student must have an excellent knowledge of various disciplines, such as income
tax, capital gains tax, estate duty, wills, trust law, retirement planning, financial
calculations, etc. The difficulty, and often the challenge, is to integrate all of the
above in a practical sensible financial plan. For instance, the mere fact that a client
has assets housed in a trust has an impact on his income tax, estate duty, the drafting
of a will, etc. The problem is that knowledge, or research on a technical matter, is
seldom available in a holistic manner. This makes the rendering of holistic advice
very difficult.
This publication takes into consideration the various risk profiles of clients to
ensure that the practical aspects of compliance legislation applicable to financial
planners are covered in a sensible, practical and easy to understand manner.
The aim of this book is to integrate financial planning fundamentals in a case study
format. Different case study scenarios will be dealt with, each of them focussing on a
different financial planning discipline. For example, the first case study exercise will
deal with the cash flows of a financial plan. The other case study examples will deal
with a financial plan with a specific focus on business financial planning, trusts
planning, etc.
Any student that wishes to pass the Board examination will find the book of
immense practical value.
Practitioners who prepare financial plans for clients will find the book useful since
many of the practical applications are discussed in detail.
Calculations are in respect of tax laws applicable for the tax year of assessment
ending 28 February 2013 and legislation up to 1 February 2013. Where applicable
the tax rates and Budget speech 2013 recommendations are referred to and
compared to the current position.
[3]
Contents
Case studies with explanations
1.
2.
3.
4.
5.
6.
Case study on cash flows including the accrual claim
Advanced case study on cash flows excluding the accrual claim
Case study for spouses married in community of property
Case study on basic financial planning and risk profiling
Case study including an inter vivos trust
Case study on business financial planning
Page 5
Page 34
Page 76
Page 97
Page 119
Page 164
[4]
CHAPTER 1
Case Study 1
Outcomes of this exercise.
This case study exercise is presented in a simplified manner and makes use of easy
to follow calculations. The purpose of this exercise is to understand the cash flows
of funds, the order in which the calculations are done and the presentation of the
financial plan so that a client can make an informed decision.
Where does one start with analysing the financial affairs of a client? It is obvious
that various tax calculations must be done before a diversity of cash flows can be
analysed. In the end, establishing the cash shortfalls in an estate and financial plan
is an important consideration of the financial planning exercise.1
Which calculations should be done first to prevent a planner from going back and
forth, or compel him to do various calculations simultaneously? For instance, to
calculate the estate duty deductions in an estate, the accrual claim should be
calculated before any estate duty calculation. But then, if the deceased estate cannot
satisfy the accrual claim in cash, it will have an impact on the capital gains tax
calculation since assets must be transferred to the spouse, which in turn will have an
impact on the capital gains tax payable by the deceased and thus estate duty payable
by the deceased estate. Capital gains tax payable by a deceased qualifies as an estate
duty deduction. Logic dictates that an estate duty calculation cannot be the starting
point since the accrual calculation, capital gains tax payable at death and the income
tax calculation must be done before any estate duty calculation. Only then can the
apportionment of estate duty and the final liquidity of the deceased estate be
calculated.
Immaterial and non relevant facts are often provided by a client since clients are
anxious that you must have a thorough understanding of the exceptionality of their
particular circumstances. An experienced and astute financial planner will be able
to consider the relevance of the information and guide the client to extract the
relevant and material information needed. After all, it is the duty of the financial
The following definition may serve as a guideline for all financial planners. “A financial planning solution will often propose
products that create and/or protect wealth and the solution must demonstrate a causal link with the agreed risk profile of a client.
Tax efficient products/solutions will increase the cash flow of a client, which ultimately makes the purchasing of the financial
product more affordable! - Errol Gottfried Meyer – Financial Planning Institute Sandton Convention 2011”
1
[5]
planner to determine the risk profile of the client and enter into a contractual
relationship with the client.2 It remains the duty of a skilled financial planner to
guide and educate the client so that the correct information is used in a financial
plan.3
In any financial plan or case study exercise it is always important to consider the
following:
1. Which facts are relevant.
2. The accuracy of the information.
3. The importance or weight to be attached to the information obtained.
4. Which assumptions are reasonable.
5. Which facts are relevant to the desired outcome of the exercise.
6. Which facts must not be taken into consideration.
7. The real need of the client, which is often not money related.
8. How does the financial planner satisfy such a need?
Section 8 of the General Code of Conduct FAIS Act.
Section 16 (1)(a) of the FAIS Act. “a provider must at all times render financial services honestly, fairly, with due skill, care and
diligence, and in the interests of clients and the integrity of the financial services industry. See also Johan Adriaan Steenkamp v Old
Mutual Life Assurance Company (South Africa) Limited FOC 1343/05 FS, issued 13 March 2006, where due care, skill and diligence
was absent when a broker failed to elicit enough information from a client and to convey such information to the underwriting
company.
2
3
[6]
The facts of the case.
Eric and Belinda are married and have two children, Genalee and Dale.
Personal particulars
Ages:
Eric
Belinda
Genalee
Dale
-
50 years
40 years
15 years
10 years
They are married out of community of property with the inclusion of the accrual
system. They were married on 16 December 1992 when the consumer price index
was 50 (assume). In terms of their ante-nuptial contract the value of Eric’s estate at
the date of marriage was R100 000 and that of Belinda R50 000. Assume that the
consumer price index currently stands at 150.
At the time of their marriage, both Eric and Belinda were still employed. They both
resigned from employment and Eric is now a shareholder of a successful business,
Toni’s Pizza (Pty) Ltd. The business sells pizzas and Eric is employed by Toni’s Pizza
(Pty) Ltd.
Their respective incomes and other benefits from employment are as follows:
Income and other employment benefits
Eric earns a salary of R50 000 per month. Belinda earns R10 000 per month as a
secretary.
Eric is member of Toni’s Pizza (Pty) Ltd Provident Fund. The company contributes
an amount equal to 10% of his salary to the fund. The fund was established five
years ago and the current value of his interest in the provident fund is R200 000.
The provident fund provides a death benefit of R1 200 000 on the life of Eric.
Eric nominated his wife and children as equal beneficiaries of his provident fund
benefits. His children are minors and he is aware that the board of the provident
fund will view them as dependants for purposes of the Pension Funds Act. He
[7]
requests that it must be assumed for purposes of the financial plan that the
provident fund will make payment in equal shares to his wife and two children.
In terms of the rules of the fund Eric will retire at the age of 60. Assume that the
estimated value of his interest in the provident fund at date of his retirement date
will be R4 500 000.
Business interests
Eric owns 40% of the shareholding in Toni’s Pizza (Pty) Ltd. The other shareholders
are his brother Eugene who owns 35%, and a friend Stephen who owns the
remaining 25%.
The company was recently valued to be R10 000 000.
All the shareholders entered into a buy-and-sell agreement. In terms of the
agreement the other shareholders will purchase Eric’s shares in the company in the
event of his death. Eric’s life has been insured for R4 000 000 for this purpose.
Eric’s assets
Asset
Primary residence
Shares in Toni’s Pizza (Pty) Ltd
Collective investment scheme
Value
2 000 000
4 000 000
5 000 000
Liability
500 000
0
0
Base Cost
50 000
2 500 000
800 000
Eric’s life insurance
Death claim value
Policy 1 – payable to his estate R6 000 000.
Policy 2 – payable to his spouse, Belinda R1 000 000.
Policy 3 – payable to his son Dale R500 000.
Belinda’s assets
Plot in Hermanus – R300 000.
She has no liabilities.
[8]
Concerns, goals and objectives
Retirement needs
At retirement Eric would like to receive an income which is the equivalent of
R200 000 per annum in today’s value. This income must increase annually with the
inflation rate and must be payable for a period of 15 years after his retirement.
The value of his interest in the business at the time of his retirement must not be
taken into account as capital for retirement. He would like his children to inherit the
proceeds. You are instructed by the client to only take the provident fund value into
account for determining whether Eric has sufficient retirement capital.
His wife and children
Eric would like his wife to have sufficient capital in the event of his death to enable
her to have an income of R200 000 per annum (in today’s value) for the rest of her
life. You must ignore any income she receives as a secretary. Assume that she has a
life expectancy of 35 years.
He wishes to ensure that in the event of his death each of his children will receive an
income of R50 000 per year until their 21st birthday (this is for periods of 6 and 11
years respectively). These annual income amounts must keep pace with inflation.
Eric is confident that he has made adequate provision for his dependants, but he
would like you to confirm that he is correct.
Medical scheme
Eric is a member of a medical scheme. His wife and children are also members. Eric
contributes an amount of R2 320 per month to the medical scheme.
Last Will and Testament
In terms of Eric’s current last will and testament he bequeaths an amount of
R2 000 000 million cash to each of his children. This amount must be held in trust
until the age of 21. He wants his children to inherit the above cash legacies in
addition to the capital that is needed for their maintenance until the age 21.
[9]
His will states that the collective investment scheme must be sold by his executor
and that the residue of his estate is bequeathed to his spouse.
In her will, Belinda bequeaths the residue of her estate to her husband, Eric.
Their monthly income and expenditure
Salary - Eric
Salary - Belinda
Bond instalment
Life insurance premiums
Household expenses
50 000
10 000
3 000
2 000
30 000
The interest and dividends earned on the collective investment scheme units are not
included in their monthly cash flow since it is automatically reinvested. The interest
payable on these units is 0,5% per annum of the capital value and the dividend is 1%
per annum.
The above cash flow does not include their income tax liability. You must calculate
the total income tax due.
Assumptions and rates
The following rates and assumptions are used:
 an inflation rate of 6%
 a growth rate of 9% in respect of growth investments, and a pre-tax interest
rate of 7% in respect of any fixed-interest rate investment.
 Last expenses on death amounts to R30 000 and Master’s fees R600.
Notes
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[10]
Proposed solution to Case Study
There is no prescribed methodology that must be followed. It is submitted that the
following order is used:
Calculate the accrual claim.
Calculate the tax on retirement fund lump sum benefits.
Calculate the capital gains tax payable on death.
Calculate the income tax payable on death.
Calculate estate duty and the residue for purposes of the spouse’s estate duty
deduction.
 Calculate the cash flows of the estate and the amount each beneficiary will
receive.





In this instance the accrual claim, income tax on the lump sum benefits, the capital
gains tax liability on death and the residue of the estate for the purposes of the
Section 4(q) deduction of the Estate Duty Act are done first.
The suggested order will assist you to follow a logical approach and ensure that
earlier calculations need not be recalculated. Such a chronological order will
minimize mistakes and ensure that the calculations are done in the shortest time
span.
From the facts it is quite certain that Eric has sufficient capital available to fulfil his
wishes. However, the purpose of the exercise is to understand the calculation of
cash flows. Once the correct methodology is understood, more advanced
calculations can be done to understand how to deal with shortfalls and the mismatch
of cash flows for the dependants of Eric.
Notes
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[11]
Calculate the accrual claim
Assets of Eric
Primary Residence
2 000 000
Shares in Toni's Pizza (Pty) Ltd 4 000 000
Collective investment scheme
5 000 000
Add
Policy 1 payable to estate
6 000 000
Total
17 000 000
Less
Liabilities
500 000
Bond on Primary Residence
500 000
Total
16 500 000
Less
Inherited assets
Total
16 500 000
Less
Adjusted initial value
300 000
Accrual
16 200 000
Accrual claim
8 025 000
Assets of Belinda
Plot in Hermanus
300 000
Total
300 000
300 000
300 000
150 000
150 000
Notes on the accrual claim
If a marriage is entered into after 1 November 1984 the accrual system will
automatically apply in respect of marriages out of community of property. On
dissolution of the marriage the spouse with the smaller accrual will have a claim
against the spouse with the larger accrual, for an amount equal to half the difference
of the accruals. The accrual claim represents the net value of the estate at the time
of the dissolution of the marriage less the net value of the estate at the
commencement of the estate.
The net value of the estate at commencement is adjusted with inflation in terms of
the consumer price index so that inflationary gains are excluded. In this example
Eric’s commencement value is R100 000. To calculate the adjusted initial value
R100 000 is multiplied with 150 and divided by 50.4 The same applies to the
adjusted commencement value of Belinda.
The actual CPI Index figures for the month of the conclusion of the marriage and when dissolved can be obtained from
www.statssa.gov.za.
4
[12]
Section 4(lA) of the Estate Duty Act allows a deduction5 of the accrual claim in the
estate of the deceased for purposes of estate duty.6
On the other hand a situation may occur where the deceased has an accrual claim
against the surviving spouse in which event it will be included as deemed property
in terms of section 3(3)(cA) of the Estate Duty Act. This may be problematic for the
surviving spouse since the claim must be satisfied. Where the surviving spouse
inherits the whole of the estate this does not present a problem. If assets are
liquidated to pay the accrual, negative capital gains tax may arise. The accrual claim
can be satisfied with assets and cash. Planning is necessary to determine how the
accrual claim will be paid.
Where a spouse dies after a divorce is finalised, but the accrual claim is not settled,
then the deceased spouse has a claim against the surviving spouse and the accrual
amount will not constitute deemed property, but property in terms of the Estate
Duty Act.
It cannot be said that the accrual system is similar to a marriage in community of
property.
The accrual claim is a personal claim that arises upon the dissolution of the marriage
as opposed to a marriage in community of property where each spouse is entitled to
a half undivided share of the joint estate. Therefore, inheritances received during
the accrual marriage is excluded from the accrual, but not the inheritances received
prior to the date of marriage. The reason is that the accrual is applicable to that
which was accumulated during the marriage which the spouses have built up during
the marriage.
The same reasoning does not apply to marriages in community of property, since the
criteria is not what was built up during the subsistence of the marriage, but all
assets are combined in one joint estate. This explains why non patrimonial damages
and donations received during the marriage is excluded from the accrual calculation.
Should expenses of the deceased estate also be allowed as a deduction from the
accrual calculation? Estate duty, executors fees and capital gains tax7 payable as a
result of death are not taken into consideration for purposes of this illustration.8
The accrual claim is not a debt due similar to section 4(b) of the Act and thus not subject to the restrictions that the spouse must be
resident in South Africa, or that he claim must be discharged from property included in the estate for estate duty purposes. See
Meyerowitz Meyerowitz on Administration of Estates and Their Taxation, 2010 Edition, para 28.7
6 A spouse is defined in the Act and will include a partner under a registered civil union.
5
[13]
It is may be argued that the liabilities did not exist at the time of the dissolution of
the marriage. The rationale of the accrual system is to share in the fruits of the
marriage equally.9
Note that all domestic insurance policies payable to the estate are included in the
accrual calculation. Insurance policies nominated to third parties are not included in
the accrual since the acceptance of the benefits by the beneficiary concludes a
contract between the insurance company and the beneficiary. The estate does not
acquire a right in terms of which the value of the policy can be claimed. The
beneficiary acquires the right from the terms of the insurance contract where the
benefits are made payable to the beneficiary upon acceptance of the benefits. If the
beneficiary does not accept the benefits, the proceeds of the policy will be included
in the accrual calculation.
The provident fund is not part of the accrual claim as well as assets in terms of
which the deceased held a contingent right to assets housed in a trust. Both are not
included in the accrual calculation. Where the deceased had a vested right to trust
assets it will be included in the accrual calculation.
Notes
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There
are two schools of thought and some argue that capital gains tax should be taken into consideration when calculating the
accrual claim. See an unreported judgement (case 8954/10) delivered on 10 December 2012, in the High Court of South Africa
……………………………………………………………………………………………………………………
Western
Cape where it was agreed by parties that the capital gains tax should be taken into account upon the sale of the property.
In this case it was a realized amount.
8
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The cost
of capital gains tax may be material to the valuation agreed upon. To avoid delays it must be ensured that the values
agreed upon is reasonable since SARS has an interest in the estate duty deduction which is dependent on the amount of the claim.
9 The ……………………………………………………………………………………………………………………
valuation of assets creates problematic issues. Meyerowitz (supra), para 15.48 states that where assets of a deceased estate
are realised in the course of liquidation, the realized prices are taken into account and where the assets remain unrealized their fair
……………………………………………………………………………………………………………………
or market
value at the time of death must be taken. It is suggested by him that a practical approach is for the executor to consult
and agree with the surviving spouse upon the net value of the two estates.
7
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[14]
Capital gains tax on Eric’s death
Assets of Eric
Primary
Residence
Shares in
Toni's Pizza
(Pty) Ltd
Collective
investment
scheme
Policy 1
payable to
estate
Policy 2
payable to
Belinda
Policy 3
payable to
Dale
Provident
Fund Death
Value
Market Value
Base Cost
Excluded
Rollover
Gain/Loss
2 000 000
50 000
2 000 000
-
4 000 000
2 500 000
1 500 000
5 000 000
800 000
4 200 000
6 000 000
6 000 000
-
1 000 000
1 000 000
-
500 000
500 000
-
1 200 000
1 200 000
-
Total
5 700 000
Less
300 000
Gain × 33.3%
1 798 200
Notes on capital gains tax payable on death
In terms of the Last Will and Testament the collective investment scheme must be
sold by the executor. It is therefore a deemed disposal to the estate and subject to
capital gains tax in the deceased estate.10 When the executor sells the collective
investment scheme the market value and the base cost will be very similar with the
result that no capital gains tax is payable by the estate, unless the value of the
collective investment scheme appreciated or depreciated during the time of winding
up of the estate and the sale thereof by the executor. In any event it will not form
See Newsletter by Errol Gottfried Meyer on Deceased Estates and CGT - http://www.errolseminars.mobi/wnews.php, (Date of use:
21 January 2013.
10
[15]
part of the residue of the estate that is bequeathed to the surviving spouse and
therefore the roll over relief will not apply.
The primary residence will form part of the residue of the estate and qualify for roll
over relief, provided the primary residence is not sold. This will depend if there is
sufficient liquidity in the estate so that the asset can qualify for roll over relief. In
this case study the estate is liquid and the estate will qualify for roll over relief.
All domestic policies are exempt from capital gains tax. The buy and sell policy are
not included in the capital gains tax calculations since Eric is not the owner of the
policy but merely the life assured. Estate duty includes all policies in the deceased
estate as deemed property since Eric is the life assured. The same rule is not
applicable to capital gains tax that deals with ownership and it is immaterial who the
life assured is.
Non domestic policies are included in the capital gains tax calculation and do not
qualify for the capital gains tax exclusion. They are also included for estate duty
since they constitute property and not deemed property. Where the deceased was
immediately prior to his death competent to dispose of the asset for his own benefit
or for the benefit of his estate, it will be deemed property.
The shares in Toni’s Pizza Pty Ltd may qualify for the small business exclusion
provided all the requirements are met. For the purpose of the calculation the
exclusion is ignored but should be noted in the recommendation of the financial
planner.11
Notes
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One may only disregard so much of the capital gain on disposal of the shares that relates to active business assets of a small
business. All liabilities are ignored. See SARS Comprehensive Guide, Issue 4, page 361 for examples. The exclusion for the 2012/13
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tax year is R1 800 000. Other requirements must also be met.
11
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[16]
Tax Calculation for Eric
On death
GROSS INCOME
Salary
CIS Dividends
CIS Interest
EXEMPTIONS
Interest exemption
Dividend exemption
INCOME
DEDUCTIONS
Provident Fund Contributions
Medical aid deduction
Taxable income
Plus: Taxable Capital Gain
Total Taxable Income
Tax on R617000
40%
TAX PER SCALE
REBATES
Primary - under 65
Medical aid credit
TAX PAYABLE
675 000
600 000
50 000
25 000
72 800
22 800
50 000
602 200
602 200
1 798 200
2 400 400
178 940
713 360
892 300
11 440
9 216
871 644
While alive
Taxable income
Plus: Taxable Capital Gain
Total Taxable Income
Tax on R484 000
38%
TAX PER SCALE
REBATES
Primary - under 65
Medical aid credit
TAX PAYABLE
128 400
602 200
602 200
-
44 916
-
173 316
-
11 440
9 216
152 660
[17]
Notes on tax calculation
Two calculations must be done. One calculation on death where capital gains tax is
added to the taxable income and one calculation while Eric is alive for budgeting
purposes. Note that the dividend and interest income are included in the tax
calculation since it is an accrual for income tax purposes, although reinvested. South
African dividends are fully exempt from income tax but subject to a 15%
withholding dividend tax.
The taxpayer qualifies for a medical credit that is deducted from taxable income and
rank in the same order as other rebates. If medical expenditure is excessive, then it
is possible to claim a deduction as well, which will be calculated prior to calculating
taxable income.12 Certain limitations apply and will be illustrated in more detail in
later case studies. In this case study there are no excessive expenditure and no
additional deduction for surplus medical expenditure.
The amount of the medical scheme fees tax credit for the 2012/13 tax year is as
follows:
 R230 per month in respect of benefits to the taxpayer (only member);
 R460 per month in respect of benefits to the taxpayer plus one member;
 R154 per month for any additional beneficiary exceeding the first two.
The medical aid tax credit is thus calculated as 460 + (154 × 2) = R768 per month. It
therefore amounts to R9 216 per annum.
The amount of the medical scheme fees tax credit for the 2013/14 tax year is as
follows:13
 R242 per month in respect of benefits to the taxpayer (only member);
 R484 per month in respect of benefits to the taxpayer plus one member;
 R162 per month for any additional beneficiary exceeding the first two.
The medical aid tax credit is thus calculated as 484 + (162 × 2) = R808 per month. It
therefore amounts to R9 696 per annum.
The interest exemption for the 2013/14 tax year is R23 800 for individuals below 65
years and increased from R33 000 to R34 500 for individuals 65 years and over. A
discussion document was published in September 2012 and government intends to
Taxable income is defined in the Income Tax Act as gross income less income. See the application of the definition in the tax
calculation example above.
13 Budget speech 2013.
12
[18]
proceed with the implementation of tax deferred savings and investment accounts.
All returns accrued in these accounts and any withdrawals will be exempt from tax.
It is proposed that these accounts will have an annual contribution limit of R30 000
and a lifetime limit of R500 000, which will be regularly increased in line with
inflation. The existing thresholds will not be adjusted for inflation for future years of
assessment.14
The rebates for the 2013/14tax years will be:15
 Primary
R12 080
 Secondary R6 750
 Tertiary
R2 250
For the purpose of the case study the 2012/13 tax rates are used.
Tax on provident fund lump sum
Death value of Provident Fund
Less Tax
R 945 000
Amount above R945 000
After tax amount
1 200 000
141 750
91 800
966 450
Notes on retirement tax
A lump sum that becomes payable on the death of a member is deemed to have
accrued to the member immediately prior to his death. The tax is paid by the
deceased member and not the recipients of the lump sum benefit. It is important to
calculate the after tax amount since these amounts must be taken into consideration
to calculate the value of all lump sums that is received by the dependants of Eric.
Although the amount is taxed in the hands of the deceased member, the tax can be
recovered from the person who receives the benefit.16
Therefore, the after tax amount is equally divided amongst the recipients of the
lump sum, namely Belinda, Dale and Genalee (R966 450 / 3 = R322 150). The
recovery of tax will not present a problem since tax is withheld by the employer in
terms of a tax directive. Retirement benefits do not form part of the estate and can
thus never be taken into account in the calculation of the residue of an estate.
14
Budget speech 2013.
15
Budget speech 2013.
See Botha et al Financial Planning Handbook 2013, page 937.
16
[19]
Benefits are paid directly to dependants and therefore not subject to executor’s fees.
The trustees of the provident fund have a discretion to pay benefits to the
dependants who are financially and legally dependant on the member prior to his
death.17 This will require that the financial planner makes an assumption who will
receive the benefits. In this case study it was contractually agreed that an
assumption will be made in respect of who will receive the benefits.
From 1 January 2009 a planning problem is alleviated since retirement lump sum
benefits are not included as deemed property for estate duty purpose. It now
becomes irrelevant for purposes of the spouse’s deduction which amount accrues to
the surviving spouse. An incorrect assumption prior to 1 January 2009 could have
led to a situation where more estate duty may be payable if benefits are not paid to a
surviving spouse. Since 1 January 2009 these estate duty consequences are no
longer relevant and planning can be done with more certainty.
Calculation of residue
Primary Residence
Shares in Toni's Pizza (Pty) Ltd
Collective investment scheme
Policy 1 payable to estate
Total Assets
Less
Asset Liabilities
Estate Liabilities
Total liabilities
Less bequests to children
Less Accrual
Residue before estate duty
Residue after estate duty
2 000 000
4 000 000
5 000 000
6 000 000
17 000 000
500 000
1 580 544
2 080 544
4 000 000
8 025 000
2 894 456
To be calculated
Notes on calculation of residue
Note that the total assets taken into consideration is the same amount that is used
for the accrual calculation as well as the amount that the executor’s fees are
calculated upon. This makes sense since the residue is calculated with reference to
what is in the liquidation and distribution account. Therefore, retirement benefits
and policies nominated to third parties are not included.
17
Section 37 C of the Pensions Fund Act.
[20]
To calculate the residue the capital gains tax and income tax calculation must be
known. The other estate expenses must also be included, such as executor’s fees,
last expenses and Master’s fees. The residue is calculated before the estate duty
calculation in order to determine the spouse’s deduction. The surviving spouse will
receive the actual amounts after estate duty is paid out of the residue of the estate.
The residue calculation provides two important answers:
1. To calculate the value of the spouses deduction,
2. To calculate the actual inheritance of the spouse.
It will only be possible to determine the actual assets the spouse will receive once a
liquidity analyses for the estate is done.
The estate liabilities are made up of the following:
Master's fees
Last expenses
Executor's fees
600
30 000
678 300
Income Tax and CGT
871 644
The total estate liabilities amount to R1 580 544.
R17 000 000 × 3.99% = R678 300.
The executor’s fees are
The actual residue after the payment of estate duty can only be calculated once the
estate duty is calculated and after all estate duty apportionments are done.
Notes
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[21]
Estate duty calculation
Property
Primary Residence
Shares in Toni's Pizza (Pty) Ltd
Collective investment scheme
Deemed Property
Policy 1 payable to estate
Buy and Sell policy on the life of Eric
Policy 2 payable to Belinda
Policy 3 payable to Dale
Gross Estate
Asset Liabilities
Bond on Primary Residence
Deductions to spouse
Policy 2 payable to Belinda
Accrual claim
Residue before estate duty
Estate Liabilities
Master's fees
Last expenses
Executor's fees
Income tax and CGT
Net estate
4A
Dutiable Estate
Estate duty payable
2 000 000
4 000 000
5 000 000
6 000 000
1 000 000
500 000
18 500 000
500 000
500 000
11 919 456
1 000 000
8 025 000
2 894 456
1 580 544
600
30 000
678 300
871 644
4 500 000
3 500 000
1 000 000
200 000
Notes on estate duty calculation
A reconciliation can easily be done to see if the estate duty is calculated correctly.
No estate duty is payable on assets, liabilities and estate expenses that qualifies as a
deduction for estate duty. Therefore all estate liabilities, other existing liabilities
and the residue to the spouse will qualify as an estate duty deduction. Stated
differently, the only assets that can attract estate duty is the policy payable to Dale
and the cash bequests to the children. The calculation for estate duty can thus also
be done as follows:
Policy 3 payable to Dale
Cash bequest to children
Net estate
R 500 000
R4 000 000
R4 500 000
[22]
Section 4A
Dutiable estate
Estate duty payable
R3 500 000
R 1 000 000
R 200 000.
Notes
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Apportionment of estate duty
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Apportion estate duty
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Policy
to Dale
22 222
Estate
177 778
…………………………………………………
Total
estate duty
200 000
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Notes………………………………………………………………………………………………………………
on apportionment
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The apportionment
of estate duty is an important cash flow consideration. Estate
………………………………………………………………………………………………………………
duty ………………………………………………………………………………………………………………
is not always paid out of the residue of the deceased estate. Where estate duty
is levied
on insurance policies payable to third parties, the recipient of such
……………………………………………………………………………………………………………...
proceeds are liable for a portion of the actual estate duty payable. This is due to the
[23]
estate duty “fiction” that the value of a policy is included in the deceased estate by
reason of the fact that the deceased is the life assured and not necessary the owner
of the life assurance. In this case study Dale is the recipient of Policy 3. The estate
duty attributable to such a policy is calculated as follows:
(R500 000 ÷ R4 500 000) × R200 000 = R 22 222. The estate is responsible for the
balance of R177 778 which reduces the residue of the surviving spouse. Should a
policy be nominated to a surviving spouse no estate duty is payable on such a policy
since it qualifies for the spouse’s deduction and therefore no apportionment of
estate duty is necessary. Such a policy does not attract estate duty.
From the above it is clear that the surviving spouse receives an amount of
R2 716 678 as the actual residue of the estate. Her residue for purposes of estate
duty must be reduced by the estate duty payable by the estate. Her actual residue is
thus R2 894 456 – R177 778 = R2 716 678.
An interesting aspect can be explored which may have relevance on the cash flow of
an estate. What if Eric bequeathed cash and the primary residence to the spouse?
Stated differently, the question thus asked is if it would make any difference if the
last will and testament is changed so that the primary residence plus R716 678 cash
is bequeathed to the spouse and the residue of the estate to the children? The
residue is the value of the primary residence + R716 678 = R2 716 678.
The quick answer is that more estate duty will be payable since it is more beneficial
from an estate duty point of view to bequeath the residue to the surviving spouse. 18
If we do the calculation we will discover that additional estate duty will be payable
with the result that less monies will be payable to the heirs of the estate. If the
calculation is true, then from an estate duty perspective it is preferable to structure
the last will and testament so that the residue is payable to the surviving spouse
instead of the children or other third parties.19
Compare the following calculations for estate duty. The only change is that a direct
bequest is made to the spouse instead of the residue. Eric will pay more estate duty.
See DM Davis & C Beneke Estate Planning (Online version LexisNexis May 2013 – SI 37) par 2.5A.
See http://www.errolseminars.mobi/wnewsdisp.php?id=9238, (Date of use 21 January 2013). See calculation which explains the
rationale and cash flows.
18
19
[24]
The relevant aspects are illustrated in cursive.
Property
Primary Residence
Shares in Toni's Pizza (Pty) Ltd
Collective investment scheme
Deemed Property
Policy 1 payable to estate
Buy and Sell policy on the life of Eric
Policy 2 payable to Belinda
Policy 3 payable to Dale
Gross Estate
Asset Liabilities
Bond on Primary Residence
Deductions to spouse
Policy 2 payable to Belinda
Accrual claim
Bequests to spouse (residence and surplus cash)
Estate Liabilities
Master's fees
Last expenses
Executor's fees
Income tax and CGT
Net estate
4A
Dutiable Estate
Estate duty payable
2 000 000
4 000 000
5 000 000
6 000 000
1 000 000
500 000
18 500 000
500 000
500 000
11 741 678
1 000 000
8 025 000
2 716 678
1 580 544
600
30 000
678 300
871 644
4 677 778
3 500 000
1 177 778
235 556
An additional estate duty of R35 556 is payable.
Notes
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[25]
Liquidity analysis
Cash In
Policy 1 payable to estate
Collective investment scheme
Shares in Toni's Pizza (Pty) Ltd
Totals
Surplus from Estate
6 000 000
5 000 000
4 000 000
Cash Out
Bond on Primary Residence
Estate duty payable
Master's fees
Last expenses
Executor's fees
Income tax and CGT
Accrual paid in cash
Children's inheritances
15 000 000
716 678
500 000
177 778
600
30 000
678 300
871 644
8 025 000
4 000 000
14 283 322
Notes on liquidity analysis.
The liquidity analyses is calculated to determine:
1. If there is sufficient cash in the estate to pay the cash bequests and estate
expenses.
2. The cash residue of the spouse.
Note that the estate only pays R177 778 estate duty. Provident fund proceeds and
insurance policies nominated to third parties are not included since it is not part of
the estate. The liquidity analyses only takes into account the cash received and
payable by the estate.
In this instance there is sufficient liquidity in the estate to pay the accrual claim in
cash. This is not always the case. The estate has a cash surplus of R716 678 which
will be paid as part of the residue to the surviving spouse. The actual residue of the
spouse after the payment of the estate duty amounts to R2 716 678.
It is therefore self explanatory that she will receive the primary residence valued at
2 million plus the surplus (residue of the estate) of R716 678!
The shareholding of Eric was purchased in terms of the buy and sell agreement and
therefore creates additional liquidity in the estate. The spouse receives the value of
R2 716 678 from the deceased’s estate.
[26]
Cash values accruing to each dependant
Belinda (surviving spouse)
Belinda
Provident fund
Policy 2 payable to Belinda
Accrual claim
Surplus from Estate
Less estate duty
Available cash to invest
322 150
1 000 000
8 025 000
716 678
10 063 828
Notes on cash inheritance
The purpose of the above calculation is to determine the value of cash assets
accruing to the dependants of Eric.
Note that the calculation illustrates the cash amounts that she will receive. It must
be kept in mind that in addition to the cash amounts she also receives the primary
residence.
No estate duty must be deducted since the estate duty payable by the estate of
R177 778 is already accounted for in the surplus she receives from the estate.
Dale
Dale
Provident fund
Policy 3 payable to Dale
Inheritance
Less estate duty
Available cash to invest
322 150
500 000
2 000 000
22 222
2 799 928
Notes on cash inheritance
Dale will only receive cash as his share of the inheritance from the deceased estate,
retirement funds and policies. He still needs to account for estate duty payable,
namely R22 222 since it is not paid out of the residue of the estate. He was the
recipient of the life policy to the value of R500 000.
[27]
Genalee
Genalee
Provident fund
Inheritance
Available cash to invest
322 150
2 000 000
2 322 150
Notes on cash inheritance
Genalee only receives cash and need not account for any additional estate duty.
Tax calculation Belinda
While alive
Notes on Income Tax
GROSS INCOME
Salary
EXEMPTIONS
Interest exemption
INCOME
DEDUCTIONS
Taxable income
Plus: Taxable Capital Gain
Total Taxable Income
Tax on R120 000
18%
TAX PER SCALE
REBATES
Primary
TAX PAYABLE
120 000
120 000
120 000
120 000
120 000
21 600
21 600
11 440
10 160
It is necessary to do this calculation to calculate the budget of Eric and Belinda.
Notes
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[28]
Retirement provisions calculation
Capital needed
Future value of salary needed.
PV
N
I
C/FV
200 000
10
6
358 170
Calculate PV of capital needed at retirement.
BGN MODE
PMT
N
RR
C/PV
358 170
15
2.83
4 451 371
In terms of the facts Eric will have R4 500 000 in his provident fund and should
therefore have sufficient capital before retirement tax is taken into consideration.
The future tax tables at retirement is unknown and have to be taken into account at
date of retirement. If we assume that the retirement tax remains the same until date
of retirement, it is estimated that approximately 36% of the fund value will be lost to
SARS. In such instance tax planning will be necessary to reduce the tax liability at
the date of retirement.
Note that annuities taken instead of a retirement lump sum (rules of the fund
permitting) will not be subject to retirement tax, but the marginal tax rate as and
when the annuities accrue to the taxpayer. The marginal tax rate for a person who
receives an income of R200 000 per annum amounts to approximately 25%, which
is less than the 36% retirement tax rate.
Notes
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[29]
Maintenance for dependants calculations at Eric’s death
Belinda needs
BGN MODE
PMT
N
RR
C/PV
200 000
35
2.83
4 530 804
Belinda has R10 063 828 cash available therefore sufficient capital for her needs.
Dale needs
BGN MODE
PMT
N
RR
C/PV
50 000
11
2.83
480 234
Dale has R2 799 928 and therefore sufficient capital for his needs.
Genalee needs
BGN MODE
PMT
N
RR
C/PV
50 000
6
2.83
280 101
Genalee has R2 322 150 and therefore sufficient capital for her needs.
Notes on calculations
This calculation serves to illustrate the capital needed for Eric’s dependants at his
death. In all instances sufficient capital is available and Eric was correct that
sufficient capital is available. It must be noted that the buy and sell agreement
[30]
provides the bulk of the liquidity, but even if the buy and sell agreement is not
honoured, sufficient capital will be available.
The purpose of the retirement calculation is to determine if Eric has sufficient
retirement capital. Firstly, if the current value of the salary needed is R200 000,
then the purchasing power of R200 000 in ten years times amounts to R358 170.
To receive an annual income of R358 170 for 15 years, keeping pace with inflation,
an amount of R4 451 371 is needed at age 60.
The resultant rate is calculated as follows:
(9 – 6) ÷ 1,06 = 2,83
Revised Budget including the income tax payable
Notes on revised budget
Income
Salary
Belinda's income
CIS Dividends
CIS Interest
Total
Surplus
Expenses
Household Expenditure
Primary residence bond
payments
Medical aid contributions
Policy premiums
600 000
120 000
720 000
109 340
Income Tax - Eric
Income Tax - Belinda
360 000
36 000
27 840
24 000
152 660
10 160
610 660
The final step is the budget of Eric and Belinda taking into consideration the income
tax payable.
Surplus funds are available each year which can be utilized to purchase additional
risk products such as an income protector, additional retirement capital, repayment
of debt, etc.
Note the dividends and interest income are reinvested and is not included in the
budget. The withholding tax on dividends are therefore not relevant for the budget
of Eric and Belinda.
[31]
Self assessment.
State whether the following questions are true or false.
1. It is prudent to do the capital gains tax and the estate duty calculation before the
accrual calculation since these taxes are taken into consideration in calculating
the accrual.
False, these expenses are not included in the accrual calculations and it is
therefore prudent to start with the accrual calculation.
2. Belinda receives a primary residence from Eric’s estate and the base cost of the
primary residence when she disposes thereof is 2 million.
False, she acquires the same base cost that Eric had, namely R50 000.
3. Non domestic policies will be subject to estate duty and capital gains tax upon
the death of a deceased.
True.
4. The beneficiaries of retirement lump sums are subject to taxation.
False, the deceased member is subject to tax but the tax payable may be
recovered from a beneficiary.
5. Bequeathing the residue of the estate to the surviving spouse can reduce the
estate duty liability of the estate as opposed to a legacy to the spouse of the same
value.
True, since the residue of the spouse is calculated before estate duty is
accounted for.
6. A domestic insurance policy nominated to the surviving spouse attracts no
additional estate duty and executor’s fees.
True, since the policy is not included in the estate of the deceased and qualifies
for the spouse’s deduction.
[32]
7. Domestic insurance policies payable to the estate is included in the accrual
calculation.
True.
8. All inheritances are excluded from the accrual calculation.
False, only inheritances received during the accrual is excluded.
9. Eric and his brother Eugene holds more than 50% of the shareholding in Pizza
(Pty) Ltd and it therefore does not qualify for the estate duty exclusion in
respect of the policies.
False, blood relationship is not relevant to qualify for the buy and sell estate
duty exclusion.
10. The shareholding of Eric in Pizza Pty Ltd is not included in property for estate
duty purposes since it is in terms of the buy and sell agreement.
False, the shareholding is an asset at the date of death and therefore included as
property for estate duty purposes.
END OF CHAPTER 1