Estate planning: where do we stand?

South Africans spend much time and effort implementing extensive estate plans that legally avoid estate duty, yet actual estate duty collections are just R1 billion per annum in the context of the total tax collection of the R1 trillion forecast for 2014/15.

The fundamental problem with estate planning is that it’s based on the tax system today, but that could change in the future.

A review of the estate duty system will be conducted in 2014, meaning the system could be substantially changed, but probably not before 2016.

Fortunately estate duty doesn’t form a major component of any tax regime today. In short, estate duty is an old form of taxation that was extremely effective 100 years ago when life expectancy was far shorter than it is today. Therefore it can be expected that changes to the system won’t seek to materially increase the estate duty tax burden.

This article identifies issues taxpayers should consider when devising an estate plan.

Do I really need an estate plan?

There’s a common misconception that effective estate planning can be achieved only through the creation of trusts and family investment companies.

There are four fundamental abatements in the estate duty system:

  • primary abatement – R3,5 million per taxpayer, with the unused portion transferable to the surviving spouse
  • inter-spouse bequest exemption – unlimited
  • exemption of death benefits from retirement funds from estate duty – unlimited
  • exemption of bequests to charitable causes – unlimited.

If one considers the combined life expectancy of both husband and wife, accumulated investment capital of most South African families will be expended during retirement. For many families the stark reality is that children have a far greater prospect of inheriting their parents than their parents’ money. Estate duty liability for most South African families is therefore a very distant prospect if properly addressed in the last will and testament.

The immediate urgency in estate planning usually occurs in situations where the taxpayer doesn’t have a spouse and therefore can’t apply the inter-spouse abatement. Remember, the definition of ‘spouse’ according to the Income Tax Act includes not only married persons but also all relationships of a permanent nature.

There are a few instances where the taxpayer is truly ‘single’ or considers it inappropriate to make inter-spouse bequests. In such instances a carefully considered estate plan may well be needed.

When in doubt, form a family investment company

In the past many taxpayers devised elaborate estate planning structures consisting of companies with different classes of share capital. However, this was before the imposition of capital gains tax (CGT) and dividends tax in 2001.

It’s become increasingly difficult to devise a company structure that dispenses with estate duty liability.

Furthermore, in today’s tax environment company capital gains are taxed at a flat rate of 18,67%, followed by dividends tax at 15%, resulting in a combined tax rate of 33,67% . This capital tax rate far exceeds the rates applied to trusts (26,67%) and individuals (13,3%).

When in doubt, form a trust

Trusts are subject to capital gains tax levied at a flat rate of 26,67%. However, this can be legally avoided by attributing the capital gain to be taxed in the hands of the trust’s donors or beneficiaries (in most instances individual taxpayers are subject to the flat CGT rate of 13,3%).

There can be no guarantee that the ‘attribution provisions’ of the Income Tax Act (Sections 7 and 25B) will be allowed to continue. These provisions were scheduled for review by National Treasury in the 2012/13 Budget Review. However, the review has now been referred to the Davis Tax Committee. The review should be complete by the end of 2014 and subject to debate during 2015. Amendments will follow as part of the 2016 legislative cycle.

Is it time to abandon trust arrangements?

Probably not. There are enormous consequences to dissolving existing trust arrangements.

First and foremost, the transfer of assets from a trust is deemed a CGT event, with the value determined at the higher of the proceeds and market value. This can result in substantial upfront tax liability. There can also be further costs in the form of VAT, transfer duty, marketable securities tax costs and selling expenses.

The dissolution of a trust must be achieved in the best interests of the beneficiaries specified in the trust deed. This isn’t always easily determined as the best interests of the beneficiary may not always be in the best interest of the donors, irrespective of the taxation consequences.

The surviving spouse exemption

Estate plans have traditionally concentrated on passing wealth to the next generation while minimising estate duty liability. However, increased life expectancy could result in a surviving spouse living for many years. There’s even the prospect that surviving grandparents may also require financial support.

The modern estate plan may well have to address surviving parents and even grandparents as a higher priority than surviving children.

Costs of administering an estate plan

One must always consider the costs of estate planning versus the prospects of achieving estate duty savings. In recent years the compliance costs associated with administering an elaborate estate plan have escalated substantially.

Offshore assets

Following the 2003 amnesty process, many South Africans have disclosed their offshore investments to SARS. Part of this process is that the offshore assets are included in the estate duty computation.

Naturally, most South Africans are reluctant to repatriate foreign assets in order to pay estate duty. This has the potential to increase the cash strain placed on the South African estate.

Many South African estates have experienced problems in accessing foreign assets to be administered by a South African executor. In some instances it’s necessary to execute a separate will that specifically deals with assets held offshore.

Capital gains tax liability

Estate duty liability is calculated at 20% of the value of the estate after abatements. The various abatements outlined above can amount to millions and dissipate the liability considerably, if not entirely.

However, CGT is imposed at up to 13,3% on death, subject to an abatement of only R300 000. In many cases this can lead to a CGT liability that exceeds the estate duty liability.

Liquidity of the estate

Irrespective of estate duty liability many South African estates do not have sufficient liquidity to execute the bequests of the deceased. Simply put, the estate plan doesn’t often anticipate the cash needed to settle creditors’ claims, discharge tax liabilities and pay executors.

Forced sale of assets to discharge the claims against the estate often leads to a disastrous loss in values.

Part of an estate duty review should involve an annual assessment of claims against the estate and determining the cash requirements of the estate.

Retirement fund reform

Many estate plans are based on the concept of bequeathing R3,5 million (the basic abatement) to surviving children. The remainder is bequeathed to the surviving spouse and therefore isn’t subject to estate duty. Today, bequests to persons other than the surviving spouse can be supplemented by the bequest of retirement fund death benefits.

It’s important to note the awarding of retirement fund death benefits is made by the trustees of the fund and not in accordance with the last will and testament. Accordingly, appropriate beneficiary nomination forms must be properly executed.

The estate planning opportunities inherent to the use of retirement funds are unlimited. In many respects the retirement fund has become the estate planning mechanism of the future. Furthermore, contribution to retirement funds is no longer subject to age limitation.

Some say the ‘capping’ of retirement fund contributions for income tax purposes (27,5% of taxable income or R350 000 per annum) results in there being no purpose in making contributions beyond that tax deduction level. This argument has limited merit.

Contributions to retirement funds that aren’t tax-deductible can be repaid as tax-free death benefits that are exempt from estate duty. Furthermore, the growth of investments within retirement funds remains free of CGT, income and dividends tax while they remain in the fund.

All in all, the tax concessions granted to retirement funds total about R30 billion per annum. It’s up to the taxpayer to mine these benefits.


The estate planning arena is changing. South Africans used to view financial planning as being primarily estate duty planning.

Today, financial planning is mostly about living and not dying. Or solving the question ‘how are we going to live for more than 20 years in retirement without becoming a burden on someone else?’

For all but the very wealthy, estate duty isn’t the threat it’s made out to be.

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