When someone we love dies, life doesn't stop while we grieve. The process of winding up the deceased person's estate starts even while the family is still in mourning, because there are legal and financial implications for the heirs to the estate.

Leaving someone an asset in a will can bring unforeseen costs, which might include capital gains tax (CGT), and the cost of insuring, storing, securing, and maintaining certain high-value assets (for example, collections of art or classic cars). If you're planning to leave specific assets to loved ones in your will, or you inherit an asset, what do you need to know?

Estate duty

Estate duty is the tax levied on your estate after certain allowable deductions. Currently, under South Africa's Estate Duty Act, the first R3.5 million of an estate's value is exempt from estate duty, so you'll pay no estate duty on estates valued below that amount. However, if an estate is worth more than R3.5 million, you are taxed at 20% on the portion of the value above that threshold. If an estate's value exceeds R30 million, the estate duty percentage increases to 25% on the amount above R30 million.

The total value of the estate is made up of all the deceased's assets – including property and investments. Deductions are allowed for certain allowable liabilities, bequests to public benefit organisations that are registered with SARS, and property accruing to surviving spouses, which can significantly reduce the taxable value of the estate.

It is important to remember that if you are married and you bequeath all your assets to your spouse and do not use your R3.5 million rebate – or only use part of the rebate – the remaining portion of the rebate will be transferred to your spouse when you die. This transfer of the tax rebate only applies between spouses.

If you inherit assets in an estate, you should consult a professional to help you understand the laws and potential tax deductions that apply, as well as any responsibilities or further costs that you might face as the owner of the asset.

Capital gains tax

CGT applies to the sale of many of your assets while you're alive, but it's also another important cost to consider when doing estate planning. If you buy an asset that appreciates in value – like property or shares – and when you eventually sell it for a net gain, you are liable for CGT. Where this net gain exceeds R40,000 in a tax year, you must pay tax of 40% of the net gain above R40,000. The proceeds (the value you received for selling the asset) and the cost of the asset must be included in your annual tax return.

In South Africa, when you die your estate becomes a separate taxpayer. This means that when your assets move from your current tax number to a new 'estate late' tax number, there is a 'deemed' sale of your assets resulting in CGT in your deceased tax number tax return. However, in the tax year of your death, your CGT rebate goes from R40,000 to R300,000.

The executors of your estate will need to finalise your tax return and include all the CGT in your deceased tax return. This means that the assets in the 'estate late' tax return are all valued at their market value, given that the assets were effectively 'sold' on the date of death to your 'estate late'.  Generally, when you inherit an asset from an estate late, there is no CGT because the value of the asset is already at market value.

The heirs of an estate will only be liable for CGT if and when they sell the asset they inherited. For CGT purposes, the 'cost' is deemed to be its market value on the date of the transfer from the estate to you. You can see that the estate could become liable for CGT if it takes a long time to wind up, because the market value of an asset could have changed between the date it was included in the estate, and the date when the estate finally distributes the asset to the beneficiary. If the estate cannot pay the CGT, as an heir, you will have to pay it. Furthermore, if you later sell the asset and it has increased in value, you will be liable for CGT.

Some assets, usually referred to as 'personal use' assets, are exempt from CGT even when you inherit them. This category may also refer to alternative assets like art collections or even vintage cars.

Costs of winding up an estate

In addition to estate duty and CGT, there are other costs involved in winding up an estate, like conveyancing costs, executor fees, other legal fees, and Master fees. From an estate planning perspective, it's important to remember 2 things:

• Your estate cannot be wound up until all the liabilities have been paid off – these include estate duty, outstanding debt, and the various legal fees.
• If the cash and other investments in the estate are not enough to cover the liabilities, the executor may have to sell certain assets to pay off the amounts owed.

This is a serious complication, because if the asset is sold, it obviously can't be inherited. Avoid this scenario by getting advice from a professional estate planning expert. They can explain how to structure your estate so that debt, fees, and estate duty are covered, and the rest of your estate can be distributed according to your will. They may suggest products like life insurance, credit life cover, medical insurance, and funeral cover, to ensure that as much of your estate as possible remains intact for your beneficiaries and heirs to inherit.

Nedbank offers estate planning products and services that include free drafting of wills and professional executor services for winding up your estate.