In South Africa, succession law allows individuals the freedom to decide how their estates should be distributed upon death, subject to very few limitations. For those who have spent a lifetime accumulating wealth, one of the most important financial goals is ensuring that this wealth passes smoothly to the next generation. Succession planning is therefore a vital part of a holistic financial strategy. It requires careful consideration of all assets—local and offshore—and a deep understanding of the legal, tax, and practical implications of wealth transfer. In this article, we explore the tools and mechanisms available to ensure a seamless and tax-efficient transfer of assets to the next generation.
A last will and testament
The cornerstone of any succession plan is a valid and carefully structured Will. Your Will should never be drafted in isolation but must align with your broader estate and financial planning strategy. Factors such as your matrimonial property regime, legal obligations of maintenance and support, and offshore holdings can all affect how your Will should be structured. A well-drafted Will allows you to appoint an executor, establish a testamentary trust for minor children or dependants with special needs, make special bequests, and designate your heirs. Proper structuring of your Will can also help reduce estate duty and ensure there is sufficient liquidity in your estate to cover administrative costs and taxes.
For those with offshore assets, the need for a foreign Will depends on the jurisdiction and nature of the asset. Civil law jurisdictions such as France, Spain, Portugal, the Netherlands, and Mauritius impose forced heirship rules, which may override the provisions in your South African Will and understanding these legal limitations is essential to avoid unintended consequences.
Trusts
Trusts are powerful tools for succession planning, commonly used to safeguard assets and transfer wealth to the next generation. Depending on your goals and family structure, you may use either an inter vivos (living) trust or a testamentary trust. The decision will depend on the nature of the assets, the age and needs of beneficiaries, and the intention for the asset. Testamentary trusts, which are created through your Will, are typically used to house assets intended for minor children or vulnerable dependants. Upon your death, the trust is activated, and the assets are managed by trustees on behalf of your beneficiaries.
Inter vivos trusts can be useful for holding appreciating assets like holiday homes or family farms. Placing these assets in a trust while you are alive ensures they remain outside of your personal estate, reducing estate duty and capital gains tax liabilities. Your children can then inherit the use or benefit of the asset without incurring additional transfer costs. Special trusts may be formed where the beneficiary has a permanent physical or mental disability and is unable to manage their financial affairs. These can be set up either inter vivos or testamentary and qualify for favourable tax treatment if established under Section 6B(1) of the Income Tax Act. A special trust enjoys the same income tax rates as individuals and can claim annual CGT exclusions and the primary residence exclusion where applicable.
Donations
Donations made during your lifetime are another method of transferring assets to your heirs or to causes you support. Donations below R100 000 per annum are exempt from Donations Tax. Beyond this threshold, the donation is taxed at 20% up to R30 million and 25% thereafter. This mechanism is particularly useful for transferring assets into a trust to reduce the value of your estate over time. However, transferring assets to a trust comes with the caveat of relinquishing control. Therefore, the implications of such a move should be carefully considered in consultation with your financial advisor.
Spouses can donate to one another tax-free, and genuine contributions made for the maintenance of another person are also exempt. Additionally, donations to government entities or registered political parties are exempt from Donations Tax. For those wishing to support charitable causes, Section 18A of the Income Tax Act permits individuals to donate up to 10% of their taxable income to registered Public Benefit Organisations. Donations that qualify under this section are tax-deductible, provided you obtain a valid Section 18A certificate from SARS.
Business assurance
If your business represents a significant portion of your estate, succession planning should include a strategy for handling your business interests. You may wish for the value of your business to provide for your family in the event of your death. However, this requires proper planning to avoid complications. Buy-and-sell insurance is a common method to manage business succession. It involves shareholders taking out life cover on each other’s lives based on their proportional ownership. If structured correctly and backed by a formal business assurance agreement, the proceeds of this policy can be used by surviving shareholders to purchase the deceased’s interest. Importantly, when properly implemented, these proceeds do not form part of the deceased’s estate and are not subject to estate duty. Professional advice is essential when setting up business assurance to ensure compliance and optimal structuring.
Beneficiary nominations
Another simple but effective succession planning tool is the nomination of beneficiaries on your life policies and living annuities. Nominating your spouse or children on a life policy ensures that they receive the proceeds directly upon your passing. Be aware, however, that such proceeds are considered deemed property for estate duty purposes and must be factored into your estate planning. Living annuities offer an additional succession benefit. By nominating beneficiaries, your capital can be transferred directly to your heirs, bypassing the delays and costs associated with the estate administration process. Furthermore, the value of a living annuity falls outside of your deceased estate and is not subject to estate duty, making it a particularly efficient succession vehicle.
Retirement funds
Retirement annuities offer tax-efficient benefits both during your lifetime and upon death. Contributions are tax deductible up to certain limits, and investment growth within the fund is tax-free. In the event of your death, retirement annuities fall outside of your estate and are not subject to estate duty. However, it’s important to understand how Section 37C of the Pension Funds Act affects succession. This section governs the distribution of retirement fund benefits and mandates that fund trustees determine who your financial dependants are before allocating the benefits. While you may nominate beneficiaries on your retirement fund, these nominations are merely a guide to the trustees, who will make the final decision based on their investigation.
While the intention of Section 37C is to protect dependants, bear in mind that the outcome may not always align with your personal wishes. It is therefore critical to align your succession plan with these legal provisions and to communicate clearly with your financial advisor to avoid confusion or conflict.
Effective succession planning requires a comprehensive and integrated approach to managing your assets, understanding applicable tax and legal considerations, and choosing the most appropriate structures to facilitate wealth transfer. Whether through a trust, retirement fund, life policy, or charitable donation, there are a range of mechanisms available to help you preserve your legacy and provide for the next generation. With the right advice and planning, you can ensure that your estate is distributed according to your wishes, in the most efficient and meaningful way possible.
Have a super day.
Sue
