The annual national Budget may signal that it is time for you to review your estate plan - and last week's Budget is no exception.
The Budget often contains provisions that will affect how your assets will be distributed among your dependants and beneficiaries.
And for people who have done no estate planning or, even worse, who do not have a will, the need to plan your estate is even more urgent.
If you die intestate (without a will), your assets will be divided according to a prescribed formula, and you could well find that someone who does not need your money will be given priority over someone who does.
The changes and proposals in Finance Minister Trevor Manuel's latest Budget that affect estate planning include:
- Tax on life assurance benefits.
Estate duty is levied on most but not all life assurance benefits. This discrepancy can arise as a consequence of who paid the pre-miums. The National Treasury says the disparity creates the opportunity for "creative" estate planning - which is often exploited by the wealthy - but it presents an inadvertent trap for the unwary.
The National Treasury is proposing an explicit exemption from estate duty on life assurance benefits up to a yet-to-be-determined threshold, on the condition that the policy was not taken out shortly before death.
The National Treasury says the same disparity exists in the case of retirement fund benefits payable at death, and it wants to introduce a threshold similar to the one proposed for life assurance benefits.
- Double tax on trusts.
Various types of trusts are often used in estate planning to, among other things, protect assets against the possibility that they could be wasted or to ensure that minors are left financially secure in the event that both parents die simultaneously.
The current tax structures for the vesting of assets in a trust can trigger double tax: when they vest (when you have a right to the assets) and again when they accrue (when you actually receive the assets). This is to be corrected so that the assets are taxed only once.
- Estate redistributions.
Heirs often wish to swap the assets they have been bequeathed. For example, a son with no interest in farming may have been left a farm, while a daughter who wants to be a farmer has been bequeathed a less valuable property in a coastal resort.
To provide for such cases, the capital gains tax (CGT) structure was changed recently to allow for a redistribution of inherited assets among heirs.
But the change did not take account of correcting settlements.
The National Treasury says the tax rules are to be changed to cover situations where a capital gain occurs when the difference in the value of the assets is made up by one heir transferring cash or other assets to the other.
- Tax-dodging.
Unlike other tax legislation, estate duty legislation does not contain a general anti-avoidance rule. The general anti-avoidance rule will be added to estate duty legislation, as will specific rules "to prevent the artificial manipulation of estate values through the use of short-term trusts and similar arrangements".
This is not a move against trusts in general, but is aimed specifically at trusts that are established shortly before death or at death for short periods, usually of less than a year, to manipulate values downwards.
- Time limits.
Currently, the South African Revenue Service (SARS) can assess an estate for an indefinite period of time after death. A time limit applies only if SARS conducts an additional assessment.
It has been proposed that a time limit be set for an initial assessment.
Estate duty is levied as follows:
- All assets that are left to a spouse or a common-law partner are exempt from estate duty;
- The first R3.5 million of assets are exempt from estate duty; and
- Any amount above these exemptions is taxed at 20 percent.
CGT on death is levied as follows:
- An exclusion on the first:
* R120 000 of the taxable capital gains made on all the assets in your estate; and
* R1.5 million of the capital gain on your primary residence.
- Any gains in excess of these exemptions are taxed at a maximum effective rate of 10 percent.
The details of the proposals may be provided when the Revenue Laws Amendment Bill is tabled in Parliament later this year.