At a recent dinner party I attended, conversation around the table turned – as it so often does these days – to the ever-increasing cost of living. As my fellow guests discussed bonds, interest rates and the cost of raising children, it occurred to me that much as the cost of living is seen as the proverbial noose around one’s neck, the cost of dying involves expenses that most of us haven’t planned for either.
When I ventured this opinion, forks scraped on plates, chairs shifted and silence ensued, until one brave soul finally asked, “What expenses are you talking about?” This gave me the opportunity to explain some of the costs involved in leaving a legacy.
Estate duty
While many of us have drafted Wills that specify whom our heirs will be, we do not often consider the cost of transferring the assets we have accumulated to those heirs. Estate duty is a case in point. Not only is estate duty levied on the worldwide estate of any deceased person who is deemed to be ordinarily resident in South Africa, it is also levied on the South African assets of non-residents.
In the calculation of estate duty, which is levied at 20% on the first ZAR30 million ($1.5 million) of the value of a deceased estate and at 25% on the value of an estate in excess of ZAR30 million, a number of factors are taken into consideration, including the gross value of the deceased estate plus deemed assets (i.e. the value of a life insurance policy of which the beneficiary is any person other than a spouse or a permanent life partner) less any allowable deductions.
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It should be noted that there are life insurance policies which do not benefit a spouse or permanent life partner that may be excluded. The first is if the life insurance policy is the financial instrument that underpins a buy-and-sell agreement, subject to how the buy-and-sell agreement is structured. The second is where the life insurance policy is recorded in an antenuptial (or postnuptial) contract and the beneficiary thereof is a child of the deceased or a spouse.
There are other allowable deductions too, which include but are not limited to, a rebate of ZAR3.5 million (approximately $184,000), assets bequeathed to a spouse or permanent life partner, liabilities in South Africa, funeral expenses, estate expenses, and offshore assets acquired by donation or inheritance, subject to the donor or deceased having been a non-resident at the date of the donation or at date of death.
A question of liquidity
It is also important to note that estate duty is payable within one year of date of death, irrespective of what phase of administration your executor is undertaking. The question, which not only pertains to estate duty, but to any other taxes and auxiliary estate expenses, is whether your estate will have the sufficient liquidity to settle such taxes.
At this point, my fellow diners had charged their glasses, I assumed, to make the conversation a little more palatable.
A question was raised as to whether it may be sensible to bequeath your entire estate to a surviving spouse or permanent life partner. While this may defer the tax, it may not be a feasible solution for the single parent who wishes to pass assets to his/her child(ren), or for the blended family, or for those who wish to leave assets to a parent, sibling or family member in excess of ZAR3.5 million (with consideration of those deemed assets which are not excluded).
It also does not take the simultaneous death of spouses into account. And if you have ventured beyond the shores of South Africa and invested offshore, your death may result in situs taxes, which could include the jurisdiction’s equivalent of estate duty, subject to the double death duty agreements in effect with South Africa.
Capital gains tax
A deceased person is deemed to have disposed of all their assets at their date of death, which brings us to the subject of capital gains tax. There is an exemption of capital gains in respect of all assets that devolve on a surviving spouse or permanent life partner (with the surviving party acquiring the asset at its original acquisition value). However, any assets that devolve on third parties (i.e. children, family, friends and trusts) are subject to capital gains tax at the marginal tax rate of the deceased, subject to an abatement of ZAR2 million (approximately $105,000) in respect of the deceased’s primary residence (where held jointly, this abatement is apportioned) and ZAR300,000 ($15,800) in respect of all investable assets.
Income tax
By now, my fellow guests were looking increasingly despondent, but alas, I was not done yet. The last of the ‘big’ taxes is income tax, which is levied from March 1 of a year of assessment to the date of death of the deceased. Subject to the nature of the assets in the deceased estate, and the nature of the income such assets produce, a deceased estate may also be liable for tax. The one silver lining in this regard is that all immovable property transferred from a deceased estate to any heir is exempt from transfer duty.
As the party contemplated the implications of all three taxes that may be levied, the host wondered what steps could be taken to mitigate the complexities of estate and legacy planning. This was a question I was happy to answer in the hope of lightening the mood.
It pays to plan ahead
Estate Planning involves more than simply arranging for the distribution of your assets following your death, so professional advice is key. Depending on
your current and future needs, estate planning should be an ongoing process, and undertaking a liquidity analysis will help to determine the feasibility of your intentions.
As the conversation turned to lighter matters and the evening drew to a close, it became clear that the ‘dinner at mine next time’ invitation would not be extended to me. However forewarned is forearmed, and while Benjamin Franklin may not have had estate planning and the liquidity requirements in mind when he said, “Beware of the little expenses, a small leak will sink a great ship”, it is certainly apt.
Thoughtful estate planning, which considers your intentions, assets in multiple jurisdictions, taxes payable, potential expenses and conflicts of law,
will ensure that you, your family and other beneficiaries can enjoy the maximum benefit from your estate, both during your lifetime and after your death.
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