Estate planning: how to ensure that your heirs (and not the taxman) benefit from your estate

Estate planning: how to ensure that your heirs (and not the taxman) benefit from your estate


Ian Beere. Confused by estate duty law? Estate planning is part of our service.

Ian Beere CA(SA) CFP®

Estate planning helps you avoid bequeathing a portion of your hard-earned cash to the taxman when you die, rather than leaving it to provide for your loved ones. Because as much as you may not want the taxman to benefit from your death, estate duty lies in wait to pounce on the assets of the unwary.

Similarly, capital gains tax and donations tax have an impact on what actions you can do with your assets while you are still alive. With these complexities in mind, it pays to be strategic about your estate planning.

Here are five estate planning tips to keep your assets safe from the taxman

  1. Invest in a retirement annuity
  2. Take out life insurance to cover the estate duty on assets
  3. Form an inter vivos trust and use it to buy your growth lifestyle assets
  4. Donate R100,000 per annum to your trust
  5. Amend your will to bequeath R3,500,000 to your trust

1. Invest in an RA

A retirement annuity can be both an investment and an estate planning tool. It saves you tax both in life and on death. Firstly, you get a tax deduction for your contributions in the year that you make them. Secondly, you enjoy tax-free growth on the value of the investments in the RA. Thirdly, it is excluded from your estate on death.

A final benefit is that when you die, any contributions for which you have not yet received a deduction are not taxed in the hands of your beneficiaries. This means that you can use a lump-sum contribution as fuss-free ways to transfer wealth if death gives you advance notice that your time is nearly up.

2. Buy/keep life insurance for taxes on assets not in purchased in trust

For estate planning purposes, ideally you should purchase growth assets that you want to leave to future generations in an inter vivos trust. However, the cost of moving such assets into trust after the fact can be prohibitive. In such a case it is usually more cost-effective to buy or keep life assurance for the purpose of using it to fund the taxes incurred on your death.

3. Form an inter vivos trust and use it to buy your growth lifestyle assets

Assets such as a holiday house or farm become more and more valuable over time, and in estate planning terms this increases the cost of transferring them to next generation to carry on the legacy of good times. There are two taxes that will affect you here – capital gains tax and estate duty.  For assets held over a long time capital gains tax can eat up 13.3% of the growth in value. Then estate duty comes in and gobbles 20% of the balance.

If you purchase such assets in a trust set up during your lifetime you can avoid having to transfer the assets on death. If you have already purchased such assets in your own name and moving them is too costly, #2 above is the best way to leave enough cash to pay the transfer costs if you want your heirs to be able to afford to keep the assets. 

4. Donate R100,000 p.a. to your trust

If you choose to move assets into a trust to save estate duty, you may donate R100,000 per person per annum to such a trust without attracting any donations tax. Effectively, a couple could donate R200,000 per annum and over five years, you will have removed R1,000,000, plus any growth, from your joint estate.  This would be a net saving of donations tax in excess of R200,000 (as donations tax is levied at 20 %.

5. Bequeath R3.5m to your trust

In estate planning terms, estates worth less than R3.5m attract no estate duty.  In addition, amounts left to a spouse are also free of estate duty and any capital gains tax is deferred until the spouse sells the asset. In the past it was common to leave R3.5m to a trust which would have the effect of your children benefiting from both your and your spouse’s estate duty exemption.

Recently the law was changed to allow your spouse to inherit your estate duty exemption, if you left your assets to them.  This has reduced the need for the use of trusts to be able to enjoy both exemptions in estate planning. However if your spouse is much younger than you, leaving money to a trust should still be considered for growth assets. At normal growth rates, the amount left to trust would double in around ten years, thus shielding twice that amount from both estate duty and capital gains tax. The additional tax savings would exceed R1,000,000.

Next step – find an estate planning guide

It pays to be wise and tax-wary! Do your estate planning early and make sure that taxman gets as little as possible of the assets that you want to pass on to your heirs.

Contact us at Netto Invest and ask our CERTIFIED FINANCIAL PLANNER® professionals to shine a light on your current estate planning situation.

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