Conventional wisdom dictates that
only death and taxes are certain. However, in a country where 50% of voters are
now reportedly in favour of an unlawful tax boycott [link: https://bit.ly/2P38Vjr],
the need for lawful tax avoidance is even more certain. Sakkie Burger of VDT Attorneys
shares some tips on structuring your estate to avoid tax as far as possible.
Death is indeed certain. So is your tax obligation. But many
people underestimate how far-reaching your tax obligations can be after death.
Sakkie Burger explains that there
are three broad charges and taxes involved in the administration of a deceased
The executor’s fees. The current maximum fee is
3.5% (excluding VAT) of the gross value of the estate payable to the person or
institution performing the complex task of administering the estate. The
executor will also be entitled to a portion of all the funds collected on
behalf of the deceased estate.
Estate duty. This is a tax levied by the
government. It is currently 20% of the dutiable estate up to R30 million and
25% on the amount above R30 million. An estate with a nett value of less than
R3.5 million will pay no estate duty.
Capital gains tax (CGT). Often forgotten is the
issue of CGT. The Income Tax Act stipulates that death triggers a “deemed
disposal” of the deceased’s assets. Most of the normal rules to calculate CGT
applies to the deceased estate as if the person sold everything he or she owned
in the last second of their life.
From the above, it is apparent
that estate planning is a crucial and complex exercise which requires expert
advice. Responsible financial planning will ensure that your deceased estate
has enough liquidity to pay all the associated charges and taxes without
forcing the sale of more illiquid assets, such as property, to cover these
Burger gives the following broad guidelines on how the
charges and taxes may be minimised:
1. Nominate beneficiaries for life insurance
policies and negotiate fees
With larger estates, most
executors will be willing to negotiate the fee at the time of drafting the will
or even when the family of the deceased approaches a potential executor.
Certain measures will also reduce
the executor’s fees. An easy measure is to appoint a beneficiary for your life
policy as the proceeds will be paid directly to that beneficiary and not the
estate. “Do note that the proceeds will
still be subject to estate duty. There is also a danger that an estate will not
have sufficient cash for all the expenses if all life policies are paid
directly to beneficiaries,” he says.
Many people try to avoid executor
fees altogether by appointing a relative or friend as executor – often causing
long delays, and emotional and financial hardship for those left behind. “Administering an estate is very
complex. Using a skilled executor will not only save your loved ones the burden
of the vast administration involved, but also speed up the process and ensure
expeditious payment of your heirs,” Burger says.
An added benefit of using an
attorney as executor is the protection afforded to members of the public
through a fidelity fund of attorneys. Should an attorney mismanage your estate,
your loved ones will have recourse against the fund.
2. Rather leave it for your spouse
Being married or in a long-term
relationship entailing support and care has pronounced tax benefits while being
alive, but also in death.
Donations between spouses – also
in anticipation of death – is exempt from donations tax. In situations where
the death of a spouse is anticipated, nothing prevents the dying spouse to donate
his or her assets to a spouse to decrease the size of the estate and therefore
Parents wishing to provide for
their children in the event of death may be tempted to leave sizeable assets
for their children. Although this may be appropriate in certain circumstances,
the testator should bear in mind that such inheritances will not benefit from
spousal tax concessions.
If the surviving spouse is
willing and able to care to care for the children, there are considerable tax
benefits in nominating your spouse as heir. “Firstly, deemed disposals to a
spouse will not attract Capital Gains Tax,” Burger advises.
Legacies for spouses will also be deducted from the estate
value to arrive at the nett estate value to calculate any estate duty.
3. Doing the admin while you are alive
Older people who are in the
fortunate position of excess assets may derive tax benefits by actively
managing their estate before death. “Any person may donate assets up
to the value of R100 000 per year without attracting donations tax,”
Although any disposals of assets
will still be subject to CGT, individuals and special trusts have an annual
exemption of R40 000 of capital gains that will not attract any CGT. If an
estate is managed over several years, this could lead to considerable tax
By decreasing the value of the
deceased estate, any amounts payable in executor’s fees and estate duty will
also be decreased.
4. Don’t let the tail wag the dog
“In drafting your will and
planning your estate, your desired outcome should be the main focus rather than
avoiding tax at all costs,” Burger says.
Avoiding unnecessary tax is a
valid objective, but could lead to unforeseen problems if it becomes the main
focus and priority.
“Someone with such a large estate
that would attract considerable tax most probably has far more important
objectives and considerations than paying the last respects to his or her good