Estate planning is something that affects everyone. It is not only for the very rich who want to dodge paying a few taxes.
Debbie Tickle of accounting company KPMG has drawn up a check list of what you need to do to ensure your affairs are in order in case you die.
Is your will up to date?
If your personal circumstances have changed, for example if you have had a child since your will was drawn up, or have married or divorced, you should ensure that your will still reflects your intention regarding your assets. Periodic reviews are also necessary to ensure that your existing will and estate plan are still consistent with the prevailing tax law, which changes regularly.
Have you considered the advantages of establishing one or more family trusts?
By transferring assets into a trust, it is possible to "freeze" the value of the estate at its present value.
The growth in the assets will occur in the trust, and not in your own estate, which is particularly advantageous in inflationary conditions.
The transfer to a trust can take place either by the sale or the donation of the property, both of which have different advantages and disadvantages.
In the case of a sale, no donations tax is payable. The proceeds will form part of your estate, fixed at the present value, in the form of a loan to the trust assuming that the sale takes place on loan account, or cash proceeds.
You may donate the loan back to the trust at R25 000 a year, which is the current value of donations which may be made without incurring donations tax. Again, the income tax implications would need to be considered.
If a donation is made instead of a sale, donations tax at 25 percent will arise on the value of donations made exceeding R25 000 a year. The value of the property will be excluded from the estate (unlike the case of a sale where one will be left with the current value in the estate). In the case of either a donation or a sale, transfer costs may be involved.
The latest Katz Commission recommendations should also be considered when deciding whether to transfer assets to a trust as it is possible that tax will be levied on the increase in the value of the assets in a trust every 25 or 30 years to prevent the generation-skipping effect of trusts. A further recommendation is that distributions from trusts should in certain situations be subject to capital transfer tax.
Does the value of your estate potentially exceed R1 million?
Estate duty is payable on the value of an estate exceeding R1 million, which is the current abatement in terms of the Estate Duty Act.
The rate of estate duty payable on the excess value is currently 25 percent.
Your estate is valued at market value at the date of death, and even if you don't believe that the value of your estate is large, you may find that the R1 million threshold would be exceeded once insurance policies and fixed property have been taken into account.
Have you provided in your will for the succession of your business?
If you are a sole proprietor, shareholder of a private company, or a member of a CC, you should consider who will inherit your business interests and the rights to income generated by the business.
Have you considered donating assets to your spouse?
If your estate exceeds R1 million, while your spouse's is less than that, you may wish to consider donating certain assets to your spouse. Donations between spouses are exempt from donations tax. There is no donations tax cost in transferring assets from one spouse to the other. There may be income tax implications as a consequence of the assets donated. Also, keep the cost of transfer and stamp duty in mind.
Will there be sufficient liquidity in your estate to pay the estate duty?
Because the rate of estate duty is high, you need to ensure that there will be sufficient cash available to pay the duty.
For example, if your estate comprises largely of a share portfolio and fixed property, which you want to keep intact to provide income to support your family, you may wish to take out additional insurance to provide for the cash to pay the duty.
Have you considered the effects of Foreign State Taxes?
If you hold property outside South Africa, it is possible that the estate taxes in the country where those assets are located will apply on your death, and double taxation can result in some instances.
Usufruct and the bare dominium
There are further opportunities in estate planning, for example, the splitting of assets into a usufruct and the bare dominium.
Broadly speaking a usufruct is the right to the use or enjoyment of property belonging to another in a way which retains the original character of the property. The bare dominium is the underlying property over which the bare dominium holder has no control or use until such time as the usufruct has ended.
The benefits of the usufruct are wide but are particularly useful in providing security and benefits to assist a spouse on the death of a husband or wife. This permits the spouse to have use of the asset, for example, the residential home, while leaving the underlying bare dominium to the children.
Usufructs and bare dominiums are considered to be limited interests in assets and as such are valued in a special way for estate duty and donations tax purposes. This has the effect of permitting planning techniques which may reduce the value of the property being donated or sold.