Estate planning tools to maximise your legacy

One of the primary objectives of estate planning is to reduce the costs in your deceased estate to ensure that your loved ones benefit fully from your estate. Thankfully, a number of tools can be employed to assist in reducing estate costs and maximising the inheritance of those left behind. In this article, we explore several mechanisms, when they apply, and how best to use them.

Section 4(q) bequest to surviving spouse

SARS provides several tax benefits to married couples, including the provisions of Section 4(q) of the Estate Duty Act which stipulates that the value of all property bequeathed to a surviving spouse is deductible from the gross value of the deceased estate and therefore not estate dutiable – this being applicable whether the first-dying spouse dies testate or intestate. No capital gains tax is payable on any asset bequeathed to a surviving spouse because the surviving spouse is deemed to have acquired the asset at a base cost equal to that of the deceased spouse. Further, no transfer duty is payable when the deceased spouse leaves fixed property or a joint share in fixed property to the surviving spouse.

Consider: If a spouse bequeaths assets to someone other than his/her spouse, those assets do not qualify as a Section 4(q) bequest and may be subject to estate duty. If you’re married, it makes financial sense to undertake a joint estate planning exercise to ensure that your estate does not end up paying unnecessary taxes.

Testamentary trusts

Setting up a trust in terms of your will is another useful estate planning tool that can be employed to house and protect assets intended for minor children or beneficiaries with mental and/or physical impairment. In the event of your death, any assets intended for your minor children or special needs beneficiaries can be bequeathed to a trust which will only come into formation on death. The trust assets will be administered on behalf of your minor children or special needs beneficiaries by the trustees nominated in your will in accordance with the mandate contained in the trust deed. That said, the formation of trusts is a highly specialised area of financial planning, and it is always advisable to seek advice from a fiduciary expert to ensure that your trust complies with the strict criteria for validity. For instance, there are strict criteria pertaining to trusts set up for the benefit of mentally and/or physically impaired beneficiaries and, to qualify for the special tax dispensation afforded to special trusts type A, these trusts must receive approval from SARS.

Consider: To qualify as a special trust type A, the beneficiary must have a disability which limits his or her ability to function or perform daily activities, and can include physical, sensory, communicative, intellectual or mental impairment. To qualify, the beneficiary must have been diagnosed by a registered medical practitioner and must have had the impairment for a period of at least 12 months. Further, the impairment must be permanent in nature and the condition must not be reversible. If there is more than one beneficiary that qualifies as a special person, it is required that they should be related.

Living trusts

Living trusts, which are trusts formed during your lifetime, provide a number of estate planning benefits depending on the need of the estate planner. Firstly, a living trust allows you to peg the value of assets in your personal estate while allowing the growth of those assets to take place in the trust – the effect of which is to reduce your estate duty liabilities. A living trust can also be used to protect assets from creditors although it is important to ensure that your trust is not formed for the specific purpose of prejudicing your creditors otherwise, if challenged, it can be found to be invalid. One way of moving assets into a living trust is to sell the asset to the trust which then creates a loan in your personal estate which can be reduced over time by making use of your annual donations tax exemption of R100 000. Keep in mind, however, that while the loan account exists, it is an asset in your estate and can be attacked by creditors. Only once the value of your loan account decreases over time will the full benefits of asset protection arise. Because trusts do not die, they are particularly useful for transferring assets from generation to generation without having to go through the estate planning process and are particularly useful when leaving indivisible assets to multiple heirs across successive generations.

Consider: Once you have transferred an asset to a trust, it is important to remember that as the trust founder you are required to relinquish full control of the asset to your appointed trustees who will then manage the asset in accordance with the terms of the trust deed. 


Donations Tax is calculated at a flat rate of 20% on the value of the donation up to R30 million, and at a rate of 25% on donations over and above R30 million. However, SARS makes provision for a Donations Tax threshold of R100 000 below which no Donations Tax is payable. Once the R100 000 per year threshold is exceeded, the taxpayer is required to pay Donations Tax on the amounts that exceed the threshold. This means that, if you have an inter vivos trust, 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, while at the same time ensuring that the growth in the capital is confined to the trust structure. While this can be an effective mechanism to reduce costs in your estate, keep in mind that once the capital is donated to the trust it comes under the control of the trustees and you need to be comfortable relinquishing control of the assets.

Consider: That said, it is important to appreciate the stringent requirements for a trust’s validity particularly when it comes to establishing the trust founder’s intention for setting up the trust. If it is found that the trust founder did not intend to set up a trust or intended to create something different, the courts can rule that the trust is void. 

Life insurance

In line with the provisions of Section 4(q) of the Estate Duty Act, the proceeds of any domestic life insurance policy where your spouse is the nominated beneficiary are not subject to estate duty. By nominating your spouse as the beneficiary of such a policy, the proceeds will be paid directly to him/her in the event of your passing meaning that no estate duty nor executor’s fees will be paid on these funds. Having said that, bear in mind that life cover can provide liquidity in your estate to avoid your executor having to realise any assets you intended for your heirs. In structuring a life insurance policy earmarked for the purpose of creating liquidity, you would need to nominate your estate as the beneficiary of the policy which would ensure that upon your death such proceeds will be paid directly to your estate. 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.

Consider: For estate duty purposes, a spouse includes any partner in a marriage or customary union recognised in South Africa, any unions recognised as marriages under tenets of religion, an any same-sex or heterosexual union which the SARS Commissioner is satisfied is deemed to be permanent. If you are cohabiting with your life partner, you will therefore need to take steps to ensure that your union is viewed as permanent and this can include signing of affidavits, entering into a cohabitation agreement, providing proof of joint ownership of property, amongst other things.

Buy & sell assurance

If you have a large portion of your accumulated wealth invested in your business, then it is important to consider what will happen to your business interests in the event of your death. It is likely that you intend for the value of your business interests to provide your spouse and/or children with a source of income in the event of your passing. To ensure that the surviving shareholders are in a financial position to purchase your interests should you pass, you may want to consider taking out business assurance as a method of funding such a buy-out. Buy-and-sell insurance entails taking out life cover on each shareholder’s life based on the value of the company and in proportion to their shareholding. If correctly structured and supported by a business assurance agreement, the proceeds of a business assurance policy will not attract estate duty in the deceased’s estate and, having said that, it is always advisable to have one’s business assurance structured by an expert in this field.

Consider: To qualify for the estate duty exemption, the policy must be taken out on the life of a business partner who is a shareholder at the time of his/her 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

Living annuities are another effective mechanism for transferring wealth and reducing estate costs as the funds housed in a living annuity structure do not form part of a deceased’s estate. If you have nominated beneficiaries on your living annuity, the capital will be transferred directly to your beneficiaries in the event of your death and will bypass the estate administration process. Another advantage of having a living annuity is that your beneficiaries will have almost immediate access to the capital value and the income from the fund. After your passing, your beneficiaries may elect to withdraw the full amount, make a partial withdrawal, or continue receiving the annuity income from the fund.

Consider: If you intend to use your living annuity in this manner, keep in mind that appropriate beneficiary nomination is critical. If no beneficiaries are nominated on your living annuity, the proceeds will form part of your deceased estate but will not be included in the Estate Duty calculations, although the Executor is entitled to include the value when calculating his/her fee.

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