Rory McFarlane, of Durban attorneys Shepstone and Wylie, looks at donations in this ninth part of a series on Estate Planning.
The most obvious way of limiting the liability for estate duty when you die is to remove from your estate those assets that are likely to appreciate in value while you are still alive.
While spending is certainly one way to reduce the value of your estate, another way is to dispose of your assets, either gratuitously or for a consideration, to your heirs before your death.
But what are the legal and tax implications of making donations for estate planning purposes during your lifetime?
* Donations tax is currently payable at the rate of 25 percent on the value of any property gratuitously disposed of by a person. This is the same rate as estate duty and is effectively estate duty paid in advance.
However, if estate duty is inevitable it may be appropriate to dispose of assets at the current rate rather than a possible higher rate later.
By donating growth assets estate duty on the future growth of those assets is avoided. The donor is liable for the payment of the donations tax only.
* Donations not exceeding R25 000 in any year of your income tax assessment are exempt from donations tax.
This means that you can donate up to R25 000 a year without incurring any liability for donations tax. The cumulative effect of donating this sum every year over a long period can result in a substantial saving in estate duty.
* Donations between spouses are exempt from donations tax. Although any property left to your spouse on your death is not subject to estate duty, remember that you are each entitled to the R1 million estate duty abatement.
Therefore, if your estate exceeds R1 million, you could make a donation to your spouse so as to reduce your estate while increasing your spouse's, thereby ensuring that you are both able to use the abatement. This exemption applies even if the donation is made to a trust for the benefit of your spouse.
The exemption is only effective for couples married out of community of property.
If you are married in community of property, the total assets of your joint estate are, by operation of law, split equally when the first spouse dies.
If you are married out of community of property incorporating the accrual system, there will, to some extent, be an equalising of the growth in your and your spouse's estates when one of you dies.
Nevertheless, you should still ensure if your combined assets exceed R2 million, that each of your estates is worth at least R1 million during your lifetime.
* Donations tax is only payable if the donor is resident in South Africa.
According to current exchange control regulations, a non-resident with blocked assets in South Africa can donate up to R100 000 a year to a person who is resident in South Africa.
* Various other exemptions from the payment of donations tax are available. For example, contributions made by the donor towards the maintenance of any person as well as donations made to charitable, educational or religious institutions are exempt from donations tax.
Ask your attorney about these exemptions and whether they may be of use in your estate plan.
* A common estate planning mechanism is to sell an asset to a trust on a interest-free loan account. The asset is effectively out of the planner's estate and the planner can reduce the loan account by an annual donation. At the date of the planner's death the balance of the loan account, if any, can be bequeathed to the trust.
Interest-free and low interest loans do not give rise to donations tax and it seems unlikely that this position will change in the near future.
The sale of growth assets to a trust at market value on an interest-free loan account accordingly does not attract donations tax.
However, it may be argued that the anti-avoidance provisions of the Income Tax Act are wide enough to cover such a situation resulting in the income being deemed to be that of the seller.
To be on the safe side to prevent any donations tax, the sale agreement should make no mention of interest and the loan should be repayable on demand.
The possibility always exists that the revenue authorities will clamp down on interest-free loans and the law may be amended.
There is nothing to stop a planner from creating an interest-free loan account when an asset is transferred and then writing it off later by way of a donation when the direction of the law becomes clearer, and after the loan has already been reduced to some extent by repayment.