Richus Nel – Wealth Adviser and a Principal at PSG Wealth Old Oak
Picture this for a moment:
You have a successful business with second line succession in place. You own a luxurious residence on a wine or golf estate. You enjoy your weekends between your Hermanus/Stilbaai and Karoo retreat when you really want to get away from it all. Christmas time you alternate between New York and Paris, you have so many happy memories there with friends and family over the years.
Your substantial investment portfolio and investment properties can support you indefinitely, but you delay retirement because you love what you do.
Most of your assets are registered in separate legal structures but some are not. Your accountant often suggested estate planning, but it always sounded inconvenient and costly to move some assets out of your personal estate.
Moment of truth
All of us will eventually pass away and pay our dues. Dollar millionaires will be subjected to scrutiny by SARS in respect of capital gains, estate duty and executors will levy their fees on whatever passes through the deceased Estate.
What can be done?
Estate duty and capital gains taxes, as well as executor’s fees, can be reduced and sometimes completely avoided by intentional estate planning. Various solutions can reduce these tax implications, ideally bringing taxable amounts within the exemption thresholds to avoid paying unnecessary taxes. One strategy is to reduce your personal estate as much as possible by using separate legal structures and tax-friendly investment vehicles.
When is estate planning relevant
Even after excluding typical multi-generational assets from your personal estate, it is still critical for individuals to do proper estate planning, when:
- their dutiable estate is above the current thresholds (the current abatement is R3.5million per spouse), and/or
- their projected dutiable investments grow faster than their financial needs, in real terms.
A registered usufruct gives a legal right to the usufruct holder for the use and enjoyment of someone else’s asset. If a usufruct is managed correctly it can be a useful estate planning tool without creating unintended consequences to the deceased’s heirs.
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- Retirement annuities and living annuities
In the context of estate planning, it can be a good strategy to invest a lump sum into a retirement annuity. This is specifically so with “lazy money” such as cash and fixed interest assets which yield interest (in excess of the interest exemption), but which will be exempt within the retirement/living annuity. The proceeds of a retirement annuity, as well as a subsequent living annuity purchased with the proceeds thereof, do not form part of the deceased’s estate for estate duty purposes. In addition, if a beneficiary was nominated on the living annuity, the capital will not be subject to executor’s fees. One should however predominantly only invest capital here to fund one’s retirement.
Donations may seem rather unattractive due to the immediate CGT and donations tax implications of 20% (or 25% for amounts larger than R30m). Pre-death donations of liquid assets into a separate legal structure, can make a lot of sense because no additional CGT or transfer taxes will be triggered. Further, donations tax will be paid on the current value instead of estate duty on increased future value. Attributions rules might apply changing the tax structure of e.g. a trust so seek professional advice.
- Buy fixed property in a company or trust?
Buying fixed investment property in a company or trust is a smart move. If this entity does not have assets or income at that time, security for the mortgage may be needed. Financing the premiums on behalf of the company/trust can be treated as a donation, which can be reduced by using the donation exemption.
- Estate pegging
Estate pegging is a concept by which an individual reduces their dutiable estate value by moving assets, via a loan account, into a trust or company at the current value. Hereby all future asset growth takes place outside their personal estate.
a). In the past it was common practice to fund a company/trust with assets by way of an interest-free loan from the settlor. On 1 March 2017 SARS prescribed a “deemed interest rate” as an anti-avoidance provision. According to this provision, interest rates lower than the “official rate”, will be regarded as a deemed donation and donations tax would be levied on that donation.
b). Donations tax can be reduced by using the annual donations tax exemption. Bear in mind that the outstanding loan amount will have to be settled (needs liquidity)/written-off at the point of death. To avoid CGT on the loan written-off at death, the lender’s will, must be drafted correctly.
Plan to avoid situs tax from the outset
Situs tax is a death tax that can be levied onto assets held in foreign jurisdictions. Situs tax is one of the most, if not the most, damaging taxes that can apply to your foreign assets and should be avoided at all costs (by using the right investment vehicles and product solutions).
It can take time to rearrange assets in a cost-efficient manner. It is wise to manage taxes and executors’ fees that can carve away up to 30% of your intergenerational legacy.
Speak to a financial adviser about optimal tax efficiency and estate planning.