How you plan your finances can have a huge impact on your heirs when you die. At a meeting of the ipac/Personal Finance Investors Club in Johannesburg this week, Jenny Gordon, a senior legal adviser at Old Mutual, discussed how you need to plan your estate.
Estate planning is about more than just cutting your tax bill, and it is not only done with death in mind, Jenny Gordon, a senior legal adviser at Old Mutual, says.
Estate planning is about controlling your assets while you are alive, giving your assets to whom you want - and under the conditions you want - when you die, while saving costs and taxes wherever it is legally possible and appropriate.
The aim of estate planning is to:
- Minimise taxes;
- Provide liquidity for your estate at your death;
- Provide capital and income for your beneficiaries;
- Provide protection against insolvency; and
- Protect your business interests when you die.
You must do the following when preparing an estate plan:
- Collect data. Take stock of your assets as soon as possible and have a will drawn up;
- Calculate your estate duty to assess whether your estate faces a hefty estate duty bill;
- Analyse your liquidity. Will your estate have sufficient cash to pay the taxes, winding up costs, liabilities, maintenance claims and other costs?
- Make a plan to eliminate any shortfall in liquidity; and
- Consider ways of pegging and reducing your future estate duty and capital gains tax (CGT) liability.
Wills for offshore assets
The executor of your estate in South Africa will not be able to deal with your foreign assets, so you should have a separate will for the assets in each country. Ensure that all your wills are updated regularly and in conjunction with one another, and seek advice from experts.
Estate duty
The first R1.5 million of your estate is exempt from estate duty. The balance is taxed at 20 percent less allowable deductions.
Your estate comprises your property and your deemed property. Deemed property includes life policies, lump sums from retirement fund and accrual claims (a claim on your estate that your spouse has if you are married under the accrual system).
Allowable deductions include:
- The costs of winding up the estate;
- Your liabilities;
- Bequests to your spouse;
- Certain usufructs (the right to an asset but not the ownership) from, for example, your late spouse;
- Accruals that you owe a surviving spouse;
- Charitable bequests; and
- Certain offshore property.
Estate duty and donations tax
If you are an ordinary resident of South Africa your estate is liable on the day you die for estate duty on any assets you hold around the world, subject to certain deductions. Non residents, who leave property behind in South Africa, have to pay estate duty on the assets left in South Africa.
You pay donations tax only if you are an ordinarily resident in South Africa, but you pay it on all your property wherever it is situated.
Estate duty and CGT
In terms of the CGT laws, you are liable for tax on any profits you make when you dispose of your assets.
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The tax laws assume that you dispose of your assets when you die. Your assets are valued at market value and your estate qualifies for an exemption on the first R50 000 profit that is made. The estate is liable for tax on 25 percent of the remaining profit at your marginal rate of tax in the year that you die. For instance, if you make a profit of R10 000 in a year, you are only liable for tax on R2 500 (25 percent). If your income tax rate is 40 percent, you will pay R1 000 (40 percent of R2 500) in CGT. This translates into an effective rate of 10 percent (R1 000/R10 000) of the gain.
Certain assets are exempt from CGT. They are:
- The first R1 million gain on your primary residence (your home);
- Personal assets, such as cars;
- Assets left to a spouse;
- Bequests to public benefit organisations; and
- Long-term insurance policies (but not second-hand policies).
When calculating how much your estate will be liable for in terms of estate duty and CGT, you first have to calculate and deduct CGT before you can determine how much estate duty will have to be paid.
So, if your estate is valued at R2 million (assuming none of the assets are exempt) and the base cost of your assets (what they were worth on October 1, 2001, when CGT came into effect) is R500 000, your estate will have to pay CGT of R145 000. The calculation is as follows: R2 million - R500 000 (base cost) - R50 000 (exemption at death) = R1.45 million. R1.45 million x 10 percent (effective CGT rate) = R145 000.
The estate duty on the same estate will be R71 000. The calculation will be as follows: R2 million - R145 000 in CGT - R1.5 million abatement = R355 000. R355 000 x 20 percent (estate duty rate) = R71 000.
So the total amount of tax (CGT and estate duty) that this estate will have to pay is R216 000 (R145 000 + R71 000) if there are no deductions.
Analyse liquidity
If your estate does not have enough cash to pay the claims which arise on death and the costs and taxes associated with winding up a deceased estate, the estate may be forced to sell some of its assets to cover those costs.
To work out how liquid your estate is add up the following:
- Cash and investments;
- Life assurance that is payable to the estate;
- Any money received for bequests (you can bequeath an asset to an heir if they pay for that asset); and
- The sale of shares under buy-and-sell agreements (the sale of shares in your business when you die).
Now subtract the following costs:
- Cash needed to pay estate duty;
- Liabilities, loans and suretyships;
- Winding up expenses, including executor's fees of 3.99 percent on the gross value of assets;
- Divorce orders;
- Maintenance claims;
- Accrual claims from surviving spouses;
- Living expenses of the family during the winding up of the estate (which can take between nine and 18 months to complete);
- Income tax liability;
- CGT liability;
- Cash bequests;
- Enforceable contracts;
- Education costs of children; and
- Homeloan repayments.
A simple and cost-effective method of providing for any shortfall in liquidity is through life assurance. However, if you nominate beneficiaries on your life policy, the money will go to the beneficiaries and will not be available to cover the costs.
Making out a will
Your will is your main estate planning document, so it is important that you:
- Keep it simple and allow your executors some flexibility;
- Update your will regularly - at least every two to three years;
- Keep clear and accurate details of your assets and heirs;
- Don't attempt to draft a will without the help of experts;
- Do not appoint executors or guardians without consulting them;
- File original documents safely and let the executor/s know where to find them;
- Do not assume the assets of marriage are yours alone if you are married in community of property or with the accrual system;
- Minors can only inherit policies, not other assets; and
- If you have assets offshore, have a separate will to deal with how they must be disposed.
Next week:
How to reduce estate duty