‘Nothing in life is certain, except death and taxes,’ goes the old saying. You’ll even pay taxes after you’ve died – or rather, your estate will – in the form of estate duties. To ease the tax burden and ensure the smooth transfer of wealth to the next generation, proper – and timeous – estate planning is essential.
The wealth (the sum total of your assets) you’ve accumulated over your lifetime, and which is still in your name when you die, will be subject to estate duty on that date. From 1 March 2018, the estate duty rate is 25% on the dutiable amount of estates of more than R30 million. Any donations you may have made over your lifetime are subject to donations tax of 20% on the first R30 million of donations made during a tax year, and 25% on donations of more than R30 million. There is an annual exemption of up to R100 000 of the value of all donations made during the tax year.
According to Stanley Broun, Fiduciary and Tax Specialist at Sanlam Private Wealth, estate duty and donations tax broadly provide for the same outcome. However, says Broun, they’re separate taxes and have different impacts on both your estate and your heirs, “so bear in mind the difference when drawing up an estate plan with your adviser. By incorporating a donations strategy into your estate planning, you could, for example, essentially pay estate duty in advance to benefit your heirs after and even before you are gone”.
To illustrate this, Broun uses the example of Mrs Smith, who inherited R60 million from her late husband. Before she herself died five years later, Mrs Smith through clever investments, managed to grow the amount she inherited to R80 million. In simple terms and taking into consideration an abatement of R7 million, the estate duty payable upon her death is:
• R6 million on the first R30 million
• R10,75 million on the remaining R43 million
• Total: R16,75 million.
Assuming that after her husband’s death, Mrs Smith decides to pay estate duty ‘in advance’, by donating R10 million to each of her three children. Or she decides to donate an amount of R30 million to an inter vivos trust (a trust established while the founder is still alive), of which she and her children are the beneficiaries. When she dies, the situation is as follows:
• The donations tax on the R30 million donated to the trust or her children amounted to R5,98 million (taking into consideration the annual R100 000 donations tax exemption)
• The estate duty on the remaining R50 million (taking into account the R7 million abatement) is:
o R6 million on the first R30 million
o R3,25 million on the remaining R13 million
o Total: R9,25 million.
The combined liability for donations tax and estate duty in the second scenario amounts to R15,23 million, compared to the R16,75 million in the first scenario – a saving of R1,52 million.
“The capital gains tax consequences have largely been ignored, as the result will be very similar for donations made during a person’s lifetime, and estate duty at date of death,” says Broun.
BENEFITS OF AN INTER VIVOS TRUST
Broun explains that donating assets to an inter vivos trust can have additional benefits – especially in cases where the founder becomes unable to handle their own affairs due to physical and/or mental health issues. “For example, adult children may need to have access to funds to pay for an elderly parent’s needs, such as medical bills. Although an adult child may have power of attorney over a parent’s financial affairs, this power will fall away if the parent becomes incapacitated. Without a trust, the only alternative in such a case may be curatorship, which could be a lengthy and expensive process”.
A further benefit relates to income tax. Using this example again, Broun explains that by donating her assets to a trust, any income or gains realised and retained in the trust will remain taxable in the hands of Mrs Smith until she dies, ensuring that the lower marginal rates for individuals apply as opposed to the higher rates applicable to trusts.
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