Often not regarded as an immediate priority, estate planning is an important part of the financial planning process. In essence, estate duty is a tax payable upon death that can erode years of saving if not considered in advance.
All assets, whether based in South Africa or abroad, are taken into account to calculate the value of one’s estate. This includes fixed property, movable property such as motor vehicles, furniture, artwork, investments such as stocks and shares, interests in private companies, loan accounts, cash in the bank, unpaid salary and leave pay.
Before calculating the estate duty due to SARS, the value of all legitimate claims against the estate will be deducted from the estate’s value to arrive at a net estate value.
Some of these allowable deductions include:
- estate administration costs;
- the deceased’s liabilities, including capital gains tax liabilities, outstanding bonds, amounts owing in respect of finance agreements, credit cards, overdrafts, last medical expenses, funeral costs, household expenses, and the estate administration costs, etc.;
- tax-exempt bequests to public benefit organisations;
- life insurance policies on the life of the deceased in certain circumstances;
- property accruing to a surviving spouse, including bequests and the right to receive income where certain conditions may apply; and
- where the deceased was married in community of property and is survived by a spouse, only half of the joint estate is brought to account.
From this net estate value, a taxpayer is allowed to deduct various rebates to arrive at the dutiable estate position, which includes a primary deduction of R3.5m.
Death and taxes – what will be paid?
Currently, estate duty is levied at a rate of 20% on the net value of estates exceeding R3.5 million. For example, Mr Brown’s dutiable estate is worth R1 million. Estate duty is calculated at 20% of the dutiable estate so this equates to 20% times R1 million which amounts to R200 000.
This example illustrates why it is important to do estate planning before you draft your will. If for example, your estate is worth R10 million after tax rebates are taken into account, your estate will be liable for a hefty estate duty of R2 million, which could have been reduced through proper estate planning.
But that’s not all, proper financial estate planning will contribute to ensuring there is sufficient cash to pay any liabilities within the estate. SARS may well be one of the creditors calling as the tax liability arising from the estate must be settled by the anniversary of death, or within 30 days of assessment, if assessed earlier. If it is paid late, interest is charged at the rate of 6% per annum.
The consequence of having insufficient cash available in the estate, is that it may result in the forced sale of assets that form part of the estate.
So, even if you have never considered yourself eligible to pay a wealth tax, without proper estate planning you could well be derailing your future investment plans.
While these points cover some highlights about estate planning, every individual’s life and the status and set-up of their assets are unique. In other words, whatever your life stage or financial situation, it is advisable to contact your financial adviser. This will help ensure that you put proper estate planning measures in place that structure your assets in a way that best protects you and your loved ones financially.