Navigating death and taxes: essential estate planning tips

As the adage so aptly proclaims, ‘In this life, only death and taxes are guaranteed.’. Unfortunately, the reality is that your financial obligations to the tax authorities persist even posthumously, as estate duty and other taxes are levied against your estate before any inheritance can be paid out to your heirs.

Understanding what taxes your estate might be liable for is the first step in effective inheritance planning. This will ensure that your loved ones are still financially secure after you are gone, and you will not have to sell your hard-earned assets to service any debt.

Estate Duty

Estate duty (sometimes referred to as death tax) is a tax payable on the wealth accumulated during your lifetime and which is still in your name when you die. Fortunately, one is granted a rebate of R3.5 million, so estate duty is only taxed on the value of an estate over R3.5 million. Estate duty is levied at 20% on the first R30 million and then 25% on any further amount above R30 million.

Any inheritance your spouse receives after your passing is exempt from estate duty, but any bequests that you make to your children, or any other beneficiary is subject to estate duty. For example, this means that if your estate is worth R35 million at the end of your life, R7,250,000 is payable to Sars as estate duty, regardless of whether those assets are liquid or not. It is important to note that this tax is also levied on any foreign property owned by you.

Of significance, any wealth held in retirement annuities, pension funds, provident funds, or living annuities do not form part of the deceased estate and are therefore not included when calculating estate duty.

Capital Gains Tax

All South African residents are required to pay tax on any profits realised from the disposal of capital assets. Currently, natural persons enjoy an annual R40,000 exemption on capital gains and a 40% inclusion rate. Said differently, only 40% of your total capital gains for a tax year that exceeds R40,000 will be subject to Income Tax at your personal Income Tax rate. Furthermore, when you sell your primary residence, the first R2 million of the profit will be exempt from tax.

Upon your death, all of your capital assets are deemed to have been sold by you on the day before you died and therefore the respective gain or loss on each of your capital assets would need to be determined. The capital gain is the difference between the market value of the asset and the original cost price. Therefore, it is imperative to keep accurate records while you are alive of the original cost price of your assets as well as proof of any capital improvements made. Some assets that are not subject to capital gains tax include personal assets for private use, such as motor vehicles, cash, life insurance policies, and the proceeds from pension funds.

When you depart this world, Sars increases the annual R40,000 exemption to R300,000. Furthermore, any capital assets bequeathed to your surviving spouse would not be subject to capital gains tax.

Income Tax

You might think that Income Tax ends at the moment of your death, but this is not necessarily the case. The Executor of your estate has a duty to make sure that all tax returns of the deceased are up to date with Sars, and that any outstanding Income Tax is paid to Sars before the heirs can receive their inheritance.

The estate is also charged Income Tax on any income received while the estate is being wound up, including income received from rental income, dividends received, or even interest on the estate account until such time as the estate’s liquidation and distribution account is drawn up and approved by the Master of the High Court. Following legislative changes made in 2016, there are now effectively two tax assessments that your executor should submit – an assessment for income that predates your death, and a post-date of death assessment. A tax compliance certificate (TCC) must be obtained from Sars before the Master’s office can approve the distribution of the assets of the estate to the heirs, so it is important to make sure that all of your tax affairs do not fall by the wayside, even if you are a pensioner.

An important consideration to keep in mind is that inheritances received by heirs or beneficiaries are considered capital receipts, and are not included in the taxpayer’s gross income, since individuals who inherit assets in South Africa are not subject to any tax on their inheritance.

So, what to do?

Consulting a professional for proper estate planning is the first step in determining, firstly, whether your liquid assets are sufficient to cover any tax and estate expenses you might have, and secondly, the best way to reduce your tax liability in the event of your death.

The tax payable on a sizeable estate can seem daunting, so individuals with significant assets should consider transferring growth assets in the form of a loan account into a discretionary inter vivos trust for the benefit of their children or grandchildren. Loan repayments can make use of an individual’s annual tax-free donation limit of R100,000,00 to gradually whittle down the loan balance. In addition, the growth of the asset will then accrue to the Trust instead of that individual.

Donating assets to a trust can also be beneficial in cases where the founder is unable to handle their finances due to health concerns and allows the appointed trustees access to funds to cover medical expenses and other concerns and is a far less invasive route than having a curator appointed by the court.

At the end of the day, while death and taxes remain life's only certainties, careful planning can ensure your loved ones are shielded from the financial burden of your estate being overtaxed. With foresight, the inevitable becomes a smoother transition for those you leave behind.

* Rouchon is a managing director at Bannister Trust and estate planning consultant at Hobbs Sinclair.

PERSONAL FINANCE