Many more people are wealthier than they realise and as a result are subject to death taxes.
Martin Sweet, assistant general manager of Southern Life, told a packed meeting of the the Weekend Argus/Seeff Investors' Club that if you add up the market value of your home, your life assurance policies, your Persian carpets and your gold coins, you could very easily surpass the R1 million abatement on your estate. Whatever exceeds that amount becomes liable for duty at 25 percent.
As you have spent a lifetime creating an estate it is pointless not to preserve it as much as possible against the taxman, Sweet said. In other words, you must plan your estate in a manner which ensured continuous and optimal financial security for your dependants and heirs. Minimising your estate duty can be done by looking at:
Investment strategy;
Spouse transfer strategy; and,
Estate freezing strategy.
Investment Strategy
This meant structuring your assets to fit the definition of non-dutiable assets in terms of the Estate Duty Act. One of the ways to do this Sweet said was by purchasing a retirement annuity (RA). In this way you would be converting dutiable property into non-dutiable property. If you purchased a single-premium RA the amount taken as an annuity (a monthly pension) and not as a lump sum, would be exempt from estate duty.
Another avenue open to you would be to create a liability in the estate, but this was only suitable if you had a strong cash flow.
You could create debt by borrowing money and investing it in non-dutiable property such as farm land on which bona fide farming was taking place. The use of the debt mechanism could result in your spouse's liabilities exceeding his or her assets. This could have extremely serious consequences if you were married under an antenuptial contract with an accrual rgime.
This could only work to your benefit if you had a net gain. In the event of a spouse having a negative accrual you could find yourself in the invidious position of having to make a contribution to your spouse, Sweet said. So beware of this route.
Sweet referred to the annual exemption of R25 000 on donations. You and your spouse could together make a donations tax-exempt transfers of up to R50 000 a year and over a five-year period to a beneficiary of your estate. In this way the two of you could reduce your combined estate by over R376 000. He said the donation exemption of R25 000 was non-cumulative and would be lost if not used. Nor would a donation be restricted to a spouse or child being the recipient, but could be made to anyone, tax free for the recipient.
Spouse Transfer Strategy
Sweet said the simplest estate plan would be for you to leave all your earthly goods to your spouse.
In terms of of the Estate Duty Act the value of all property included in the deceased's estate, which in terms of the will goes to the surviving spouse, could be deducted before arriving at the net value of the estate.
Where property was left to your spouse no duty would be payable on the estate of whomever dies first. Sweet said if you died after your spouse you would have to pay the estate duty and you might not have taken any measures to lessen the liability.
This plan postponed the payment of estate duty by merely shifting the problem to the surviving spouse.
Leaving everything to your spouse had the disadvantage that other heirs could be excluded, and could create complications if your spouse, as sole beneficiary, died before you.
Another vital point Sweet highlighted was the problem of liquidity. Often estates took a long time to wind up. One way of easing the burden on your heirs or dependants would be by taking out life assurance.
Life assurance could provide the necessary cash to avoid the sell-off of long-held assets, intended to be retained within the family. Sweet said when you plan the amount of cash needed, you must bear in mind that estate duty would be payable on the assurance proceeds themselves.
Sweet said all premiums paid under a policy on your life, if you are the estate planner, plus a six percent annual compound interest were deductible from the policy proceeds for determining the estate dutiable amount of the policy.
Sweet said getting married helped to minimise estate duty because you effectively double the amount that can be abated from R1 million to R2 million.
Estate Freezing Strategy
What you were doing here by following this route would be forming a trust.
In this way you would minimise the duty payable by pegging the value of your growth assets in the estate while keeping control over those assets.
You would become one of the trustees of the trust. Sweet said that you and two or even three more people should be the trustees, not just you alone. Also one of the trustees must not be a beneficiary.
You could sell or donate growth assets (shares, immovable property) into the trust at market value so that future growth in these assets took place in the trust rather than in your hands.
If you wanted to sell the assets you could do so through a credit sale transaction in terms of which a credit loan account would be created in your favour.
Your liability in this way would be limited or pegged to the value of the assets so transferred, that being the maximum of the original sale price. Also, the credit loan due to you might be reduced by the annual donation exemption of R25 000 a year. Sales that occurred at less than market value would result in the application of donations tax at 25 percent which effectively was like paying estate duty in advance.
Sweet said what you were effectively doing in creating a trust was creating another estate outside your own.
If you were the estate planner and capital beneficiary, you must not be given vested right to the capital as this right would be included in your estate for estate duty purposes. You could, however, have access to the capital by calling up the credit loan account in whole or in part.
But, Sweet said, a trust deed should be made flexible to allow for the easy termination of trusts and transfer of assets, should a law be passed that affected the viability of trusts. Other advantages of trusts Sweet said were that they were a limited liability: assets were free of sequestration by creditors and might be easier to administer for aged, incapacitated or handicapped beneficiaries.
"Generation skipping" was also a device in which there was no estate duty liability on the part of the beneficiary as your position in the trust effectively became the heirs' inheritance.