We spend a lifetime developing a financial estate but, somehow, never find time to ensure that the assets built up are free from estate duty which, in South Africa, is based on your worldwide assets. However, this does not mean that you cannot plan accordingly.
Regardless of where your assets are invested, whether onshore or offshore, they will form part of your overall estate. In the last two budgets, comments have been made that estate duty may need to be reviewed. This does not decrease the need for serious estate planning.
Estate planning always involves weighing up various priorities and needs:
- How much would you like to leave to your spouse? Importantly, anything which accrues to the surviving spouse is exempt from estate duty.
- How much would you like to leave to your children, or other individuals, and when?
- How important is it for you to avoid paying estate duty? Currently this is 20% of any assets in excess of R3,5 million per spouse, in addition to assets bequeathed to a spouse, which are effectively exempt.
Growth Through Trusts
It’s so easy for spouses to just leave everything to each other. However, you need to understand that, by so doing, there is the worry that the widow/widower could remarry and bequeath the remainder of the estate to a new spouse, resulting in the children losing out. A recognised method of protecting the children’s inheritance, whilst simultaneously providing for the remaining spouse, is to bequeath your assets to the children if majors, or alternatively, to a trust, if minors. In the case of minors, for their benefit at age 25 or 30 for example. Then you would often leave assets to a trust, but provide the surviving spouse with a life usufruct. In this event the value of the usufruct must be calculated, as this is exempt from any estate duty payable.
When reviewing an individual’s financial plan, in which the Will forms an integral part, I frequently observe that spouses have planned their estate by using a trust, but only upon their death. I have difficulty in understanding the reasoning behind this because, if you intend to have assets transferred into a trust upon your death, surely it makes sense that some of these growth assets be transferred during your lifetime. This ensures that the growth is captured in the trust and avoids the growth attracting estate duty upon death.
A further estate duty saving mechanism is to make an annual donation of R100 000 into the same trust, without attracting any donations tax, and investments in the trust. All growth will avoid any further estate duty.
Consider the Options
These questions need to be answered:
- What percentage of your estate should be bequeathed outright to the surviving spouse?
- What percentage should go to children and to the trust? The answer depends on the size of the estate and what percentage the deceased spouse wants the survivor to inherit outright.
In my opinion it’s always good to ensure the independence of a surviving spouse and children, and this can be achieved by leaving some capital to the spouse, free from trustee control, and leaving some to the children, who are then independent of the remaining parent’s longevity. This gives all the family a degree of financial independence. So often one sees large assets held within a trust and yet the family are unable to make use of any of the capital. This suggested course will ensure everyone has some financial self-sufficiency, and the bulk of the monies is preserved in the trust for future generations. Spouses need to weigh their desire to pay as little estate duty as possible against achieving all their other important objectives.