Estate planning is key for smooth transfer of wealth to your heirs

To ensure the smooth transfer of wealth to the next generation after you’re gone, proper and timely estate planning is essential.

Failing to make plans for your estate — and review them regularly — can lead to unintended complications for your heirs.

The purpose of estate planning 

The main idea behind estate planning is to structure your affairs in such a way that you achieve these objectives:

• Protection of assets against the possibility of a forced sale by providing sufficient liquidity during the winding up of the estate; 
• Protection of business interests;
• Facilitation of the administration of the estate, taking into account the most recent changes brought by the SA Revenue Service for non-resident beneficiaries inheriting from a South African estate;
• Flexibility to ensure that future adjustments necessitated by changing financial and family needs and circumstances can be made;
• Harmony in the family; and
• Tax efficiency.

The following factors must be taken into account when you draw up your estate plan:

1. Your will

A will is the cornerstone of any estate plan. It helps to ensure that your wishes are clearly stated and makes provision for who will inherit your assets after you've passed away.

2. Marriage regime

Your marital status and regime will have an impact on the division of assets after you've passed away. For example, if you are married out of community of property with the accrual system, your surviving spouse could have a claim against your estate, or your estate could have a claim against the surviving spouse. This may create liquidity problems.

3. Estate duty and donations tax

These two taxes broadly provide for the same outcome, but they have different effects on your estate and your heirs. From March 1 2018, the estate duty rate is 20% on the first R30m of the dutiable estate and 25% on the dutiable amount of estates above R30m in value. 

Any donations you may have made over your lifetime are subject to donations tax of 20% on the first R30m (cumulative over your lifetime), and 25% on donations above this amount. You have an annual exemption of R100,000 of the value of all donations made during the tax year, and donations between spouses are exempt from donations tax. By incorporating a donations strategy into your estate planning, you could, for example, essentially pay estate duty “in advance” to benefit your heirs.

4. Capital gains tax (CGT)

You will be deemed to have disposed of your assets to your estate after you've passed away, which will have CGT implications. The annual exclusion in the year of death is R300,000. You qualify for a primary residence exemption of R2m, and R1.8m on small business assets with a market value not exceeding R10m on disposal.

5. Local and offshore trusts

These days many South Africans have assets in the country and offshore, and trusts offer an efficient and flexible way of ensuring your assets are consolidated, preserved, protected and managed objectively.

To ensure you leave an accessible legacy and don’t unintentionally create a burden for those who come after you, it is crucial that you have appropriate structures in place — such as local and offshore trusts — as part of your estate plan. It will also be important to understand the effect on beneficiaries of a local trust who have ceased their tax residency. 

6. Liquidity

You need to ensure that enough liquidity will be available for costs, liabilities and taxes to be met without having to dispose of assets at the wrong time and at relatively low prices. The following assets can be taken into account to determine the liquidity in your estate:

• Cash;
• Liquid investments; and
• Life insurance — where the estate is the nominated beneficiary.

Domestic life policies are deemed property in your estate. If you have nominated private individuals as beneficiaries, the proceeds will be paid to these beneficiaries directly but will be dutiable in your estate — with the executor being able to claim a proportionate part of estate duty from the nominated beneficiaries.

Annual review 

Estate planning is not a one-off event; your plan should be reviewed whenever your circumstances change, for example, in the event of:

• Divorce;
• Cessation of tax residency; 
• A change in marital regime;
• The addition of dependants;
• Acquiring offshore assets;
• Disability; and
• Retirement.

Compiling a comprehensive global estate plan can be complex, so it’s crucial to get professional advice. If you need any assistance, call Sanlam Private Wealth Fiduciary and Tax on +27 (0) 11-778-6600.

About the author: Stanley Broun is head of fiduciary and tax at Sanlam Private Wealth.

This article was sponsored by Sanlam Private Wealth.