ESTATE PLANNING: TAX IMPLICATIONS ON DEATH
1. “ Tax is unavoidable –even in death – and understanding the various taxes that your estate could be liable for is an important part of your estate planning “. This is how Eric Jordaan (Crue Invest (Pty) Ltd) starts his dissertation on this subject in Moneywebb of 21 January 2021. Because of the fact that there are two things in life we cannot escape –death and taxes – we thought it wise to let our readers in on the learned author’s wisdom.
2. Jordaan firstly points out that the three most common taxes the executor of your estate will need to deal with, are income tax, capital gains tax and estate duty. But what are these taxes and how do they apply to one’s estate? asks Jordaan.
3. Firstly, it is important to establish the difference between these various taxes in the context of estate planning.
4. Estate duty, which is regulated by the Estate Duty Act, is a tax charged on the transference of wealth or assets from the deceased’s estate to its beneficiaries – whether through testate or intestate succession. In other words, regardless of whether a person has a will or not, his assets will be transferred to his beneficiaries on his death and, as such, will be subject to estate duty (where applicable). On the other hand, capital gains tax is a tax charged on the gains made from the sale or transfer of an asset. Because capital gains tax is regulated by the Income Tax Act, it forms part of the deceased’s tax returns and will be dealt with as such in this article.
ESTATE DUTY
5. When a person dies, his assets will be transferred to his beneficiaries either in terms of his will or in terms of the rules of intestate succession. Either way, the state will levy estate duty at a rate of 20% on the first R30 million and at 25% on any amount greater than R30 million. While estate duty calculations can be particularly complex, simply speaking the executor is required to calculate the gross dutiable value of the deceased estate less any allowable deductions in order to arrive at the net dutiable value of the estate – upon which estate duty will charged at either 20% or 25% depending on the size of the estate.
6. According to Jordaan, one must keep in mind that every person is granted a R3.5 million estate abatement which is not subject to estate duty. In the case of married couples, section 4(q) of the Estate Duty Act allows for a deduction of any asset left to the surviving spouse. Should this be the case, the first-dying spouse will then roll over his abatement to his surviving spouse who will then have a R7 million estate duty abatement in the event of her death.
7. If you own foreign assets, it is important to take these into account when calculating your estate duty liability. Where the deceased is a resident of South Africa, keep in mind that his world-wide assets – including all property and deemed property both in and outside of South Africa – will be subject to estate duty. South Africa has entered into double taxation agreements (DTA’s) with a number of countries which set out each country’s taxing rights. Essentially, a DTA ensures that a taxpayer is not unfairly taxed both in South Africa and in the country where he holds a foreign asset. One must keep in mind that estate duty is applicable to the South African assets of deceased individuals who lived abroad.
8. When determining the net value of the deceased estate for estate duty purposes, there are a number of deductions allowed in terms of the Estate Duty Act. These include the cost of the funeral, tombstone and death bed expenses which may include medical attendance, private nursing, palliative care, and medication relating to the deceased’s last illness to the extent that the Commissioner for SARS deems them to be reasonable expenses.
9. Any retirement money that falls within the ambit of the Pension Funds Act does not form part of a deceased estate.This is because the distribution of retirement fund benefits remains the function of the fund trustees who are obliged to distribute the capital to the financial dependants of the deceased.
10. As far as living or life annuities where a beneficiary/-ies have been nominated by the deceased, are concerned, these proceeds will be paid directly to the beneficiary and do not attract estate duty. When it comes to life insurance policies, the proceeds of the policy which pay out on the death of the deceased are considered deemed property in the estate, subject to a few notable exceptions such as whether the policy was a correctly structured buy and sell policy or key-person policy.
INCOME AND CAPITAL GAINS TAX (CGT)
11. Your tax commitments do not die with you and it is important to note that SARS has first claim to what is owing to it. A deceased estate cannot be finalised until the deceased’s tax affairs have been fully settled with SARS, including income tax, CGT, donations tax and any other form of tax that may be applicable.
12. The reason why CGT arises in a deceased estate is that, in terms of the Income Tax Act, death is a CGT event, and a deceased person is deemed to have disposed of his assets for an amount equal to the market vaue of the assets on the date of death. Following the submission of the deceased’s pre-death tax assessment, which includes all income and deductions applicable up until the date of death, the executor must also prepare and file a final post-death tax assessment in which all CGT payable by the estate must be declared.
13. One must keep in mind that all CGT payable by the estate will be reflected as a liability in the estate and therefore not estate dutiable. Every individual is provided with a once-off CGT exclusion of R300 000 in the year of death, meaning that the first R300 000 of gain will be free from tax. Thereafter, any gains will be included at a rate of 40% and subject to the deceased’s marginal tax rate.
14. Certain assets in a deceased estate are excluded from CGT, including assets accruing to a surviving spouse, most assets for personal use, assets bequeathed to approved Public Benefit Organisations, and the proceeds from life insurance policies. Lastly, the Income Tax Act excludes the first R2million gain on the disposal of a primary residence.
SOURCE: MONEYWEB