Building a robust estate plan: Taxes, donations, inheritance etc

Willie Fourie, Head of Estate and Trust Services, PSG Wealth

Investment managers go to great lengths to plan ahead so that investment portfolios will withstand market volatility and unforeseen events. But how do you construct a robust estate plan that will withstand the onslaught of the many legislative changes and punitive taxes introduced in recent years?

Inheritance taxes

Inheritance tax presents the state with a final opportunity to collect a share of your wealth. And since the heirs to your estate will again pay taxes on the assets they inherit, you may be tempted to try and circumvent estate duty and the associated wealth taxes through complex estate planning.

Unfortunately, there are no simple answers when it comes to minimising inheritance taxes. Even giving it all away before you pass away will trigger taxes such as capital gains and donations tax.

So, what can you do to ensure a robust estate plan?

Focus on what you can control

The most important thing is to take care of the issues under your control. Make sure you have an updated will that suits the specific requirements of your family. Ensure that beneficiary nominations are regularly updated on your policies and retirement benefits. Planning for taxes should follow only after you have put these basics in place.

Plan for changing legislation

You’ll need to adapt to the recent legislative changes. Volumes have been written about the effect on interest-free loans to trusts since the introduction of section 7C of the Income Tax Act. Although the introduction of a new tax always triggers the creative side of estate and tax planners, be mindful of the unforeseen circumstances that many aggressive estate plans may create.

Government will always need to collect revenue and will legislate against any scheme or reorganisation of tax affairs attempting to flout its objectives, as has happened recently. It can often be very costly to unbundle a seemingly indestructible plan afterwards.

Nonetheless, there are some changes you can make which will minimise the taxes to be paid during your lifetime or at death.

Donate the loan account to a trust

One option is to donate assets in your estate (such as a loan account owed to you by a trust or other assets) to the trust. This removes the asset from your estate and, as ownership vests within the trust, no further inheritance tax will be levied on the capital. The added protection that the trust offers is a bonus.

The downside is that donations tax is levied on the value of the assets donated, at a rate of 20%. On a R10 million donation this amounts to R2 million donations tax. However, the effect is that the value of your estate is reduced by R12 million. How does this differ from keeping the asset in your estate and paying estate duty on that R10 million?

Assuming that all the abatements in the Estate Duty Act have been used, the difference lies in the timing of the payment of donations tax or estate duty. Whereas the payment of donations tax has the effect of reducing your estate by R12 million (as explained), paying estate duty results in an amount of R8 million (R10 million less R2 million estate duty) that is available for transfer to the trust after the payment of estate duty. The upfront payment of the donations tax results in lost capital that could have grown for the duration of your lifetime, however, so it’s not necessarily a simple answer.

Planning for a robust will

There is no one-size-fits all solution in estate planning, and ill-considered shortcuts may end up being your biggest downfall. To ensure your estate plan is robust, make an appointment with your fiduciary adviser to discuss the right solution for your individual circumstances.

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