Savings Month is here and as we see every July, many South Africans are taking the opportunity to review their savings habits and behaviours. One aspect that’s often overlooked is that your hard-earned savings gains can easily be undone by failing to pay sufficient attention to estate planning.
“Even if all your retirement goals fall into place as planned, the benefits can be easily undone through a careless estate plan,” says Willie Fourie, head of estate and trust services at PSG Wealth. “An incorrectly worded will or incorrectly used estate planning structure may result in a substantial portion of your lifetime savings going towards paying death duties and capital gains tax.”
He suggests you follow these four guidelines to keep your estate plan on track:
Avoid overly complex structures
A simple but properly drafted will is usually sufficient to ensure a speedy and cost-efficient transfer of assets to your heirs. Local and foreign trusts and companies can also be set up to house assets and make use of the benefits associated with these structures. Be aware, however, of the associated cost of maintaining them in foreign jurisdictions – especially where fees are charged in a foreign currency – as this may quickly negate any savings on estate duty or tax.
Use tax concessions to your advantage
Both the Estate Duty Act and the Income Tax Act offer opportunities for relief.
The Estate Duty Act contains a number of sections that can save or postpone the payment of estate duty if used correctly in a carefully drafted will:
- Section 4A provides that the first R3.5m of a deceased person’s estate is not subject to the payment of estate duty (at the current rate of 20%).
- The value of any bequest to a surviving spouse is not subject to estate duty.
- Charitable bequests are deducted from the dutiable estate.
Paragraph 80(2) of the Eighth Schedule to the Income Tax Act, as well as section 7C of the Act, can also be used to your advantage:
- Trustees can award the gains in a trust to the beneficiaries of the trust, to ensure that the capital gains are taxed at the lower inclusion rates applicable to natural persons. The effective rate of capital gains tax for trusts is 36% compared to the maximum effective rate of 18% for individuals.
- Much has been written about the effect of section 7C of the Income Tax Act, which was introduced on March 1, 2017. Any distributions by trustees to beneficiaries should firstly be used to reduce any loan accounts owed to the individual.
Unfortunately, some practitioners think that estate duty can be avoided on death by artificially creating an insolvent estate. This is normally done by the individual making loans from a trust to the extent that his liabilities (that is, the loan owed to the trust) exceed the assets in his estate on death. However, be careful what you wish for. “Unsuspecting trustees can be held personally liable by the beneficiaries if unsecured loans are not recoverable and losses are incurred in the trust,” warns Fourie.
Choose your executor carefully
Choosing the executor of your estate with care could result in substantial tax savings in the estate administration process. Selling estate assets during this process can result in a recoupment of tax if the deceased claimed a depreciation allowance on these assets.
Savings Month is a great opportunity to learn more about estate planning and to plan for a care-free tomorrow. Make sure you give careful thought to the tax implications associated with saving and investment, to ensure you don’t waste the benefit of all your disciplined savings over the years.