Estate planning is a comprehensive process where individuals organise and structure their assets to ensure their protection during their lifetime and facilitate a smooth, intentional transfer to heirs or beneficiaries upon death.
This process involves more than just writing a will – it’s about planning for the management and preservation of wealth to maintain financial security for loved ones. Estate planning is a crucial activity that everyone with assets should undertake, as it can help avoid legal complications, minimise taxes, and ensure that your wishes are fulfilled. Unfortunately, many people neglect this important process, which can lead to unintended consequences such as lengthy legal proceedings or significant tax liabilities for the beneficiaries.
A key element of estate planning is tax planning, which should be integrated into the overall strategy to minimise tax obligations. Various taxes may apply to an estate upon death, and proper planning can reduce their impact.
What is estate duty, and how is it levied?
Estate duty is levied on the death of a person and is not limited to South African residents. Generally, however, non-residents’ exposure to South African estate duty is limited to certain assets located in South Africa at the time of death.
South African estate duty rates are as follows (noting that an abatement of R3.5 million is allowed against the net value of the estate):
- The first R30 million of a person’s estate (as calculated under prevailing estate duty laws) is taxed at 20%, and
- Any amount exceeding R30 million is taxed at 25%.
Besides estate duty, South Africa levies a tax charge under the capital gains tax (“CGT”) regime on a person’s death. On a person’s death, they will be deemed to dispose of all their assets at their market value, meaning that the growth in the value of these assets (from when they were acquired until the date of death) will be taxed.
Importantly, the first R300 000 of such gains will be disregarded. Therefore, only the gains of a deceased exceeding R300 000 will be included as part of their aggregate capital gain, which must be included in their taxable income.
The role of trusts in estate planning
Trusts play a significant role in estate planning, but they should only be established when they serve a clear and specific purpose. A trust can be an effective way to protect assets, manage wealth, and ensure long-term financial stability for beneficiaries, especially in cases where the beneficiaries are young or unable to manage assets on their own. For instance, if you have minor children, you can establish a testamentary trust in your will. This trust will manage and protect the assets intended for your children until they reach an age where they are capable of handling their own financial affairs. In South Africa, this is a common and practical estate planning tool for parents.
In addition to testamentary trusts, there may be other reasons to set up a trust during your lifetime. For example, you may want to transfer growth assets, such as shares or investments, into a trust to keep them outside of your personal estate, which can help minimise estate duty. Similarly, if you own investment properties, you might consider setting up a trust to manage those assets. However, trusts come with complex legal and financial implications and creating a trust without a well-thought-out reason can lead to unnecessary costs and complications.
Trusts are highly specialised tools, and it’s advisable to consult with a fiduciary expert or estate planning professional to ensure that the trust is structured correctly and aligns with your estate planning goals.
In conclusion, estate planning and tax planning go hand in hand, and both require careful consideration to ensure that your assets are protected and passed on according to your wishes. Trusts, when used properly, can be powerful tools in achieving your estate planning objectives, but they must be set up with clear intent and expert guidance. By taking the time to plan, you can reduce the tax burden on your estate, protect your assets from legal challenges, and provide financial security for your loved ones.