Tips on tax for the financial adviser

What are some key factors to keep in mind when it comes to tax benefits in an estate plan?

Everyone's circumstances are different, so you need to consider the facts of each individual estate plan. But there are some principles to follow in most cases:

1. Use the Section 4q deduction. Under section 4(q) of the Estate Duty Act, no estate duty has to be paid on anything bequeathed (left) to a surviving spouse. It's only when the spouse dies that estate duty would have to be paid. Of course, clients don't have to leave everything to their spouse - some people might not want to do that - but do consider using this deduction in your estate planning.
2. Use the R3.5 million general abatement to its maximum - for example, by bequeathing assets to the value of R3.5 million to a trust. This abatement can be deducted from the net value of the estate, which means only the balance is subject to estate duty.
3. Structure life policies more efficiently. If If structured correctly, a "buy and sell policy" - where a business partner owns a policy on the client's life (they can buy out the client's shares in the business on the client's death) - is free of estate duty. This helps to avoid estate duty on that life policy.
4. Understand capital gains tax exemptions. There's a R300 000 capital gains death tax exemption - the estate gets the first R300 000 of gains free of capital gains tax. There's also an exemption of up to R2 million of capital gains tax on the primary residence.

How do retirement planning and life insurance fit in to an estate plan and what taxes apply?

• Life policies
  Usually, estate duties must be paid on life policies. Life policies are generally considered a "deemed asset" in terms of the Estate Duty Act. They're not a physical asset in the estate, as they don't pay into the estate normally, but are seen as an asset in the estate.
  
  The exceptions to this rule, as noted above, are when life policies pay to a spouse or there's a specific exemption, like in the "buy and sell" key-person structure correctly structured.
• Retirement funds
  Retirement funds are a lot trickier. Retirement annuities (RAs) and preservers, for example, are generally exempt from estate duty on death. However, income tax must be paid by the deceased estate if the heirs take the lump sum from these policies - just as it would be paid on a retirement. This is a tax issue people should be aware of.
• Shares and investments
  If your client has a share portfolio or investments, these are deemed to be sold after they pass away. This would then trigger capital gains tax in the estate.

So, in general, we can sum up the different duties and taxes as follows:

Tax exemptions can get quite tricky. There's a lot of interaction between the different taxes. So, professionals should look at the client's individual circumstances and advise accordingly.

Who is responsible for tax payments?

1. For estate duty
   The estate will pay estate duty on actual physical assets in the estate.
   
   If the client has life policies that pay to a beneficiary (and if estate duty is to be paid on these policies), the beneficiary of the policy would have to refund the estate duty. So, how that would work is the estate would pay the estate duty to SARS, but the beneficiary would have to pay the estate duty back to the estate.
2. For income tax
   The most interesting bit there is around retirement funds. If your client is a member of a preserver or an RA at the time they die and their heirs take the lump sum, then that tax is paid by the deceased estate. If the heirs take an annuity instead, that tax would be paid by the heirs every month as they draw the annuity.

Who is responsible for specific payments can get quite complicated, and most often depends on individual circumstances and how to comply with the law.

Do beneficiaries pay tax on assets received from an inheritance?

No. Because there's estate duty in the estate (which the deceased pays), there's no donations tax paid by the heir when they get an inheritance.

The only time there would be an exception is if they inherit money that's in some way related to their employment. Let's take an extreme example: The owner of a company dies and he leaves one of his favourite employees cash as a bequest because the employee worked for them. In theory, that could be taxable because it's considered to be a benefit of employment.

However, in general, there's no tax on an inheritance apart from the estate duties.

What if the beneficiary is a minor?

Minors can actually be taxpayers - for example, when they're beneficiaries of a trust. A minor can't receive movable assets or cash directly from an estate, but they could receive the assets through the trust, and in that way become taxpayers.

However, they generally have lower rates - particularly when they're a beneficiary of a trust. By naming a minor child as a beneficiary of a trust, clients can therefore bring down tax rates quite legitimately. As long as none of the anti-avoidance rules apply

How can donations be used in an estate plan?

Every taxpayer can donate R100 000 each tax year without having to pay donations tax. So, everyone should be making use of that. They should be donating R100 000 - normally to a trust - to get that money out of their estate.

Then, of course, between spouses you can donate whatever you want without incurring donations tax. That can also be used to bring down tax in an estate.

Are there still tax advantages to having assets in a trust?

Trusts generally aren't tax-efficient vehicles anymore. There aren't really any major tax benefits. Trusts are more about looking after the asset for heirs and managing the process to protect the asset for them.

The only tax advantage of a trust would be if the heirs are minors and named as beneficiaries. As already discussed, this can help to bring down tax rates as long as none of the anti-avoidance rules apply.

What about foreign assets in an estate plan?

One big consideration people should be aware of is that in South Africa we also apply worldwide estate duty. So, you'd pay estate duty in South Africa on any assets that you hold elsewhere in the world.

For example, if you have assets in the US or the UK, they would apply situs tax or an estate duty there ('situs' meaning where the asset is located, or sited, for legal purposes). That tax would be a credit back here. So, if the deceased dies here and has a house in America, estate duty on that property would be paid in America (at 40%). Estate duty on that same property has to be paid here in South Africa, so the duty paid oversees would be a credit back here (up to the amount of duty that has to be paid in South Africa).

If the assets are in a country that doesn't levy estate duties, like Mauritius, the estate duty is paid here in South Africa only.

There may also be capital gains tax in some jurisdictions. Some kind of transfer tax may apply in countries when properties are transferred. This doesn't apply to all countries - it depends on the jurisdiction - but it's good to be aware of this.

Harry's closing thoughts on tax matters

There's a well-known saying: "Don't be penny-wise and pound foolish."

For clients, trying to cut costs on their will and estate plan only causes more hassle and complications for their loved ones after they pass away. It just results in litigation and more expense for their heirs.

It's far better to consider everything they need to and plan properly now. They'll save on so many unnecessary costs later on. It's really worth doing things correctly with the right professionals well in advance.

Speak to your client's about holistic estate planning today