Estate duty: can and should you pay it in advance?
Fiduciary and Tax
Head of Fiduciary and Tax
Apr 06, 2022
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‘Nothing in life is certain, except death and taxes,’ goes the old saying. You’ll even pay taxes after you’ve died – or rather, your estate will – in the form of estate duties. To ease the tax burden and ensure the smooth transfer of wealth to the next generation, proper – and timeous – estate planning is essential.
The wealth (the sum total of your assets) you’ve accumulated over your lifetime, and which is still in your name when you die, will be subject to estate duty on that date. From 1 March 2018, the estate duty rate has been increased to 25% on the dutiable amount of estates of more than R30 million. Similarly, the cumulative value of taxable donations you made during your lifetime is subject to donations tax at 20% on the first R30 million, and 25% on donations of more than R30 million. There is an annual exemption of up to R100 000 of the value of all donations made during a tax year.
Estate duty and donations tax therefore broadly provide for the same outcome. However, they’re separate taxes and have different impacts on both your estate and your heirs, so bear the difference in mind when drawing up an estate plan with your adviser. By incorporating a donations strategy into your estate planning, you could, for example, essentially pay estate duty in advance to benefit your heirs after and even before you are gone.
To illustrate this, we can use the example of Mrs Smith, who inherited R60 million from her late husband. She herself has not made any prior taxable donations. Mrs Smith, through clever investments, managed to grow the amount she inherited to R80 million before she died five years later. In simple terms and taking into consideration an abatement of R7 million, the estate duty payable upon her death is:
R6 million on the first R30 million
R10.75 million on the remaining R43 million
Total: R16.75 million.
Now let’s assume that after her husband’s death, Mrs Smith decides to pay estate duty ‘in advance’, by donating R10 million to each of her three children. Or she decides to donate R30 million to an inter vivos trust (a trust established while the founder is still alive) of which she and her children are the beneficiaries. When she dies, the situation is as follows:
The donations tax on the R30 million donated to the trust or her children amounted to R5.98 million (taking into consideration the annual R100 000 donations tax exemption)
The estate duty on the remaining R50 million (taking into account the R7 million abatement) is:
R6 million on the first R30 million
R3.25 million on the remaining R13 million
Total: R9.25 million.
The combined liability for donations tax and estate duty in the second scenario amounts to R15.23 million, compared to the R16.75 million in the first scenario – a saving of R1.52 million.
The capital gains tax consequences have largely been ignored, as the result will be very similar for donations made during a person’s lifetime and estate duty at date of death.
BENEFITS OF AN INTER VIVOS TRUST
Donating assets to an inter vivos trust can have additional benefits – especially in cases where the founder becomes unable to handle their own affairs due to physical and/or mental health issues. For example, adult children may need to have access to funds to pay for an elderly parent’s needs, such as medical bills. Although an adult child may have power of attorney over a parent’s financial affairs, this power will fall away if the parent becomes incapacitated. Without a trust, the alternative in such a case may be curatorship, which could be a lengthy and expensive process.
A further benefit relates to income tax. Using our example again – by donating her assets to a trust, any income or gains realised and retained in the trust will remain taxable in the hands of Mrs Smith until she dies, ensuring that the lower marginal rates for individuals apply as opposed to the higher rates applicable to trusts.
If you have any questions or need assistance to review your estate planning or tax affairs, call Stanley Broun on 011 778 6648 for an appointment, or email firstname.lastname@example.org.
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