Advocate Tony Davey is one of my colleagues who regularly previews my articles and is often heard to quote “…One takes a lifetime to build an estate, but how much time does one take to protect it?” In a previous article, I briefly mentioned that setting up an Intervivos Trust could help to reduce death duties in the future.
Minimising estate duty is not really complex and there are several options available to you. The level of estate duty in South Africa currently stands at 20%, which is much lower than other countries that impose tax on death. Estate duty may not yield large amounts of revenue and, in the last budget, the minister announced that estate duty may be revisited or even abolished. At this stage it remains unchanged and no further information has been provided in the latest budget notes.
It’s never too late
Currently, upon death, assets left to a spouse are exempt from any duty. This is really only a deferment of payment because, once children inherit the assets, on the death of the remaining parent, duty is payable once lawful deductions have been made.
When children inherit they will receive a total of R7 million free of death duties. Previously each individual spouse only received a maximum entitlement of R3,5 million and some estate planners argue that it is no longer necessary to set up elaborate trust structures to deal with anything less than this amount. I disagree with this view because the future growth of these assets is being overlooked. The transfer of assets to a trust ensured that both spouses used their R3,5 million deduction. Now the unused amount will be available for the second deceased.
To illustrate this further:
A spouse inherits R3,5 million in a share portfolio but already has assets in excess of this figure. Over the next 15 years these assets grow to approximately R14 million (10% compound). The increase in the inherited assets is R10,5 million and, at current rates of duty, the estate would be liable for R2,1 million. If this amount had originally been left to a trust, R2,1 million would have been saved! One argument put forward is that the deductions are likely to increase over the years, but I have used a conservative rate of return and assumed that the current rate of estate duty will apply. In Europe, the UK and the USA rates vary between 33,3% and 55%.
I often meet individuals who have formed a trust but never transferred any assets into it. Assets that should go into a trust are growth assets such as equities, unit trusts, linked endowment policies and shares in private companies. I do not recommend transferring investment properties into a trust, because of the transfer fees involved, and certainly not your primary residence because you will lose the gain of R1,5 million allowed as an abatement for Capital Gains Tax (CGT) purposes. Other than estate planning, there are many other reasons for using a trust, but I will discuss these in a future article. Fortuitously, there is no better time for considering the transfer of equities, including unit trusts, because values are substantially lower. You will have to pay 0,25% tax if you transfer from your personal name into a Trust. This cost is insignificant when compared to paying estate duty. You will also have to pay CGT, but this tax is always inherent in the value of your assets and is payable whenever an asset is sold. There are a few other ways to reduce estate duty.
1. Donations. Everyone is entitled to donate R100 000 annually free of donations tax and too few people make use of this concession. Married couples who donate R200 000 a year to their children for 10 years, will save over R700 000. Over 20 years, they will save R2,5 million in death duties (investment return 10% per annum compounded).
2. Trusts. Create an Intervivos Trust during your lifetime and allow the growth to accumulate outside your estate. In my opinion, fears that trusts may be outlawed sometime in the future are unfounded as trust law has been around for over 1 000 years, since the Crusades. During your lifetime, you may not be saving anything yourself by using these options, but you will benefit your heirs. Not only will you have created an estate but also protected it. Prior to embarking on any of the suggestions made herein – and with special reference to those planning to emigrate – it is essential to consult with qualified professionals in this field.