Estate planning: These mechanisms can be highly effective when planning your legacy

Freedom of testation means that you can use your will to distribute your assets amongst your heirs and beneficiaries as you deem fit, subject to a few exceptions. That said, it is important to understand which assets fall within your estate and will be subject to estate administration, and which assets fall outside of your estate, and how they will be dealt with in the event of your passing. In this article, we explore a number of useful estate planning mechanisms available to maximise the financial legacy you wish to leave your loved ones.


Trusts make excellent estate planning tools as they can serve to both protect assets intended for your loved ones and reduce taxes, with certain trusts also enjoying protection from creditors. However, it is imperative that trusts are set up correctly to meet the estate planner’s objectives and to ensure they meet the requirements for validity. Keep in mind also that there are costs involved in setting up and managing trusts and these costs must be weighed against the benefits of having a trust as part of one’s estate plan. A testamentary trust, which is set up in terms of your will, is the most widely used in South Africa and can be used to protect the assets bequeathed to a surviving spouse, minor children, or children with special needs. On the other hand, living trusts – which are set up during the estate planner’s lifetime – can be used to house growth assets such as property or shares intended for future generations, reduce estate duty, and keep assets safe from creditors. To achieve this, the estate planner can transfer immovable property into the inter vivos trust thereby ensuring that any growth in the value of the asset takes place within the trust and not in his/her personal estate. Having said that, keep in mind that saving on tax and estate costs should not be the overriding reason for setting up a trust. The decision to set up a trust should be a strategic one designed to ensure that your longer-term estate planning objectives are achieved.

Important note: When transferring assets into a living trust, the trust founder is required to relinquish control of those assets to the trustees. This can have a significant bearing on the trust founder’s personal estate planning and it is advisable to seek expert advice before transferring assets to a trust. Remember, when donating assets to a trust, there may be donations tax implications for the trust founder which need to be taken into consideration. On the other hand, when selling assets to the trust there may be capital gains tax implications on that transaction that need to be considered. Further, while any growth on the asset takes place within the trust, if the founder has created a loan account to fund the sale of assets into the trust, the loan remains an asset in the trust founder’s estate.

Special bequests

When drafting your will, bear in mind that there are a number of ways to distribute assets to your beneficiaries, with special bequests being one of them. A special bequest can be used to leave a particular asset or cash amount to a beneficiary who, in this context, is referred to as a legatee. However, when making a special bequest in your will, it is important to understand the process of administering a deceased estate and the potential impact that special bequests can ultimately have on the inheritance received by your heirs. When winding up a deceased estate, the executor will first need to settle all debts and costs in the estate, following which all bequests to legatees must be honoured. Whatever remains in the estate thereafter is referred to as the estate residue, being the portion that the testator’s heirs will ultimately receive. If there is not sufficient liquidity in the deceased estate to honour the special bequest, the executor may need to realise assets intended for the heirs which could have devastating financial effects for them. For instance, if you bequeath a bonded property to a legatee, keep in mind that the executor will need to settle the bond from the residue of the estate before transferring the asset into the name of the legatee which, in turn, could reduce the inheritance of your heirs.

Important note: Our law presumes that a testator intends his legatees to receive their bequests unburdened. This means that if a testator leaves, for instance, a financed vehicle to a legatee, the executor will need to first settle the amount outstanding on the car from the estate. If there is insufficient liquidity in the estate, the executor may need to sell assets in the estate in order to settle the vehicle.


Donations and exemptions can also be effective in your estate plan to reduce the value of your estate during your lifetime, thereby reducing your estate liability in the event of your death. Donations are regulated by the Income Tax Act and are subject to donations tax at a flat rate of 20% of the value of the donation not exceeding R30 million and 25% on the value exceeding this amount. However, before making any donations with a view to reducing taxes in your estate, it is important to understand how they work and what exceptions apply. For example, donations between spouses are exempt from tax as are donations made to government, registered political parties, and approved public benefit organisations (with certain limitations). In addition, individuals are permitted to make donations of up to R100 000 per year free from donations tax – a benefit that can be used strategically to move personal assets into a trust over time. Having said that, it is important to understand the longer-term effects of relinquishing control of assets into a trust.

Important note: This donations tax exemption can be used effectively when transferring assets into a living trust. If you sell a growth asset to a trust, you can use your annual donations tax exemption of R100 000 to reduce the value of the loan account each year, thereby reducing your estate duty liability over time.

Life cover

Life insurance policies can be used to create liquidity in your estate and to make financial provision for your spouse and/or beneficiaries. However, as with other estate planning tools, it is essential to correctly structure your policy so that it serves its intended purposes. If you nominate a beneficiary or beneficiaries on your life policy, bear in mind that the proceeds of the policy will be regarded as deemed property in your estate, and the value of the proceeds will be taken into account for estate duty purposes. While domestic key person and business assurance policies are exempt from estate duty, it is important that these policies meet the qualifying criteria for exemption and that they are correctly structured.  In calculating the appropriate level of life cover required, it is important to take into account factors such as how much debt would need to be covered in the event of your death, your estate duty and other taxes, and the extent to which you would need to provide for your loved ones. Insufficient liquidity in your estate may mean that your executor must realise an asset intended for your heirs which could leave them inadequately provided for.

Important note: In order to qualify for the above-mentioned exemption, a buy-and-sell policy must be taken out on the life of a business partner who is a shareholder at the time of his death. It must also be evident that the policy was taken out with the specific purchase of buying the deceased’s business interests, and that the deceased did not pay the policy premiums.

Living annuities

If you have a living annuity with nominated beneficiaries, it is important to note that the value of the funds in the living annuity does not form part of your deceased estate and, as such, these investments can be used to reduce your estate duty liability. In the event of your passing, the remaining capital in your living annuity will be distributed directly to your nominated beneficiaries without attracting estate duty or executor’s fees. As an estate planning tool, a living annuity is advantageous for your loved ones as it gives them almost immediate access to the capital and income from the investment. In the event of your death, your loved ones can choose to make a full or partial withdrawal of the capital, bearing in mind that they will be taxed as per the retirement tax tables. Alternatively, they can keep the annuity in their names with the option of adjusting the drawdown rates and underlying investment portfolios.

Important note: Where the annuitant has not nominated any beneficiaries to the living annuity, the residual capital will be administered as part of the deceased’s estate.

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