This is the second in a two part series on how to plan for death.
Estate duty planning has a new lease on life after Finance Minister Chris Liebenberg raised the duty rate by 66 percent earlier this month.
The rate was hiked from 15 to 25 percent, but the sharp rise is merely a forerunner to more bitter things, as South Africa could see its death duty rate end up at 40 percent - the international norm.
The estate duty net will also be cast wider by both the vagaries of inflation and a possible lowering of the current R1 million tax-free abatement.
Southern Life estimates that 180 000 families are currently affected by estate duty, but if the abatement is lowered to R700 000, 500 000 families will be liable for duty.
There are lots of ways to plan your financial affairs (some were highlighted last week) so as to pay the least possible duty, but you should first seek the advice of an estate planning expert.
* TRUSTS
An important estate planning tool is the use of trusts. A trust is a separate legal entity which is run by the trustees (there are usually three) who manage the trust's assets for the good of the beneficiaries (the heirs).
There are two main advantages of transferring your assets to a trust: first, it freezes the value of those assets, and secondly, even though the estate planner has lowered his potential for duty by getting rid of his assets, he has retained effective control over them (because he is one of the trustees, his spouse is the other and a friend is the third).
There are two common ways of transferring your assets into a trust. You can donate the assets and pay donations tax at 25 percent of the asset value. Using this method, neither the asset, nor the donations tax paid, is included in your final estate.
The alternative method is to sell your assets to the trust, and accept payment in the form of a loan account.
The loan account value will be included in your estate on your death (but the experts have come up with clever ways to get around this).
If you sell assets to the trust, you can reduce the loan account by donating, each year, R25 000 of the loan to either the trust or your heirs (facilitated by the annual donations tax exemption of R25 000, which increases to R50 000 in total if you are married).
By transferring your assets you have shifted the future growth in those assets to the trust and have frozen their value in your estate.
Trusts come in many different guises.
The experts advise an inter-vivostrust (so called because it is created in your lifetime and not on your death), and to be most tax effective, the trust must be discretionary (that is, the trustees have the discretion to award income and capital to the beneficiaries).
Southern Life's Tony Davey, author of The LUASA Handbook of Estate Planning, makes an important point: the trust must be flexible in its conditions.
For instance, your loan account must be repayable on demand, and the estate planner must have the right to repurchase any asset at any time so that the arrangement can be scrapped if necessary.
A concern in estate planning is whether the taxman will bring in legislation, with retroactive effect, to close the planning efficacy of trusts. You can get around this, says Davey, by having a flexible trust deed which can combat any future adverse legislation.
There are costs involved in setting up a trust. The start-up costs (mostly legal fees) are between R2 000 and R5 000 depending on the complexity.
Also, you will pay costs when transferring assets to the trust: transfer duty of 10 percent on fixed property, marketable securities tax (MST) of 0,5 percent on the value of listed shares and unit trusts, and 0,5 percent on the value of unlisted shares.
* OTHER PLANNING PLOYS
Momentum Life's Martin Kourie suggests other estate planning tools for you to consider.
Buy a single premium retirement annuity (RA) as the annuity portion is excluded from your estate. If you are wealthy, buy a farm where genuine farming is carried on, as you get the benefit of Land Bank values which are lower than the market value.
Borrow funds which are then invested into an asset which is estate duty free, because in this way, you create an extra liability but the asset is exempt.