A key goal of estate planning is to reduce the amount of estate duty payable when you pass away, so that more of your financial legacy can be preserved for your loved ones. Fortunately, there are several effective ways to limit estate duty. However, it’s important to remember that these tools should never be used in isolation—they work best when integrated into a broader, well-considered tax strategy. In this article, we explore five estate planning mechanisms that can help you achieve this.
Retirement annuities as estate planning tools
A retirement annuity is an approved retirement fund which is regulated by the Pension Funds Act. This vehicle effectively allows investors to save for retirement using pre-tax money while restricting access to the funds before age 55. New generation RAs are typically housed on LISP platforms and provide more investment flexibility, including the ability to select and change the underlying investment strategy, asset allocation and contribution structure. Over and above providing tax deductions on the contributions, RA investors can enjoy further tax benefits in that no capital gains tax, dividends withholding tax or income tax on the investment growth within a retirement fund is payable.
In the event of your death, the funds held in your retirement annuity, that have met the criteria to qualify as a deduction against your taxable income, do not form part of your deceased estate and are not included when calculating your estate duty liability or executor’s fees – meaning that your RA effectively continues to provide tax benefits even after your death. In the event of your passing, the funds held in your RA will be distributed to your financial dependants at the discretion of the fund trustees, and this process is expressly provided for in terms of Section 37C of the Pension Funds Act. So, while you are permitted to nominate beneficiaries to your RA, your trustees are required to first identify those family members and/or loved ones who are financially dependent on you, and then to distribute in accordance with their respective needs.
Did you know? Because retirement annuities fall outside your estate, they are not subject to estate duty or executor’s fees, potentially saving your heirs up to 25% in combined costs on the value of the RA.
Optimising life insurance
In terms of Section 4(q) of the Estate Planning Act, all assets that accrue to your surviving spouse – either in terms of your Will or in accordance with the laws of intestate succession – are deductible from the gross value of your deceased estate and will therefore be excluded for estate duty purposes. As such, by nominating your surviving spouse as the beneficiary to your domestic life insurance policy, the proceeds of the policy will be paid directly to your spouse in the event of your passing. In bypassing your deceased estate, no estate duty nor executor’s fees will be payable on these amounts. That said, life cover can be used effectively in your estate plan to ensure that any estate duty liability can be covered without having to realise any assets intended for your heirs. In structuring a life insurance policy earmarked for these purposes, you would need to nominate your estate as the beneficiary to the policy. However, keep in mind that the proceeds from such a policy would be considered deemed property in your estate and would be included in the estate duty calculation, and you will need to adjust the cover amount accordingly.
For estate duty purposes, a spouse includes a partner in a marriage or customary union recognised in South Africa, a union recognised under religious tenets, and any permanent same-sex or heterosexual partnership recognised by SARS. If you’re cohabiting, it’s essential to demonstrate the permanence of your relationship through affidavits, a cohabitation agreement, or joint ownership of assets.
Did you know? Life insurance proceeds paid to a surviving spouse are not only estate duty-exempt—they also bypass executor’s fees, which are typically 3.5% of the gross estate value, plus VAT.
Transferring assets to a living trust
An inter vivos trust can be used effectively to house assets such as fixed property or business interests so that the growth on those assets takes place within the trust structure and not within your estate, which in turn will have the effect of reducing your estate duty liability. In order to use an inter vivos trust optimally for these purposes, you can sell the growth assets, such as a family holiday home, to the trust with the loan account forming part of your estate, although the loan amount will reflect at the selling price of the asset and not the value of the asset at death. As an estate planning tool, an inter vivos trust used for these purposes is ideal for preserving assets that are likely to pass from generation to generation, such as a family farm or holiday house.
If you choose to transfer property into an inter vivos trust, it’s crucial to understand that you lose personal control of these assets, which then become subject to trustee oversight. Carefully select your trustees and ensure your trust deed clearly defines their roles and responsibilities.
Did you know? When you sell assets to a living trust on loan account, the asset’s future capital growth occurs outside your estate, potentially reducing estate duty by millions over time.
Maximising donations tax exemptions
If you have an inter vivos trust set up, you can further reduce your estate duty liability by using your annual donations tax exemption of R100 000. If you are married, you and your spouse can donate a combined amount of R200 000 per tax year without attracting donations tax, which is levied at a flat rate of 20%, while at the same time ensuring that the growth in the capital is confined to the trust structure. While donating to a trust can reduce your estate duty liability, be cautious not to donate funds you may need for future living expenses. Once donated, the capital becomes trust property, managed exclusively by the trustees.
Did you know? By consistently donating R100 000 per year over 10 years as a couple, you can shift R1 million out of your estate, saving up to R200 000 in estate duty without triggering donations tax.
Testamentary trusts for minor children
In terms of our legislation, children under the age of 18 do not have contractual capacity and are not capable of inheriting. If you bequeath cash directly to your minor child, these funds will be administered by the state-run Guardian’s Fund on your child’s behalf until she reaches the age of majority. Where assets such as fixed property are bequeathed to your minor child, their legal guardian will likely be charged with administering the asset on the child’s behalf until she reaches age 18. Neither situation is ideal, which is why many estate planners make effective use of a testamentary trust to circumvent these potential situations. By setting up a testamentary trust in terms of your Will and nominating the trust as the beneficiary of those assets intended for the benefit of your minor children, you can ensure that these assets will be transferred directly to the trust in the event of your passing.
Did you know? If a testamentary trust is not in place, your minor child’s inheritance may be tied up in the Guardian’s Fund—currently holding millions in unclaimed funds due to administration backlogs and inefficiencies.
Have a great day!
Sue
