Estate planning is an uncomfortable but necessary step in your wealth management. If you want to pass on a legacy to your loved ones, or if you're appointed as the executor of a loved one's estate, you need to understand the taxes and costs involved in winding up a deceased estate to ensure the smooth transfer of wealth. You also need to know which assets in the estate are exempt from taxes or other costs. 

Understanding estate duty

Estate planning is about much more than drafting your will. Managing your assets to optimise the various taxes applicable in your estate is just as important. These include estate duty, capital gains tax (CGT), and donations tax, along with the costs of other legal processes that govern the winding up of your estate, which is ultimately overseen by the Master of the High Court.   

In simple terms, your estate is all the assets and liabilities you leave behind when you pass away. This includes all real estate and property, bank accounts, investments, your personal belongings of value like vehicles, art, collections, and jewellery, plus liabilities like loans or other debt. When you die, your estate becomes a separate legal entity, responsible for settling debts and distributing what remains to the rightful heirs, administered legally by the Master of the High Court.  

Estate duty is calculated according to the taxable value of a deceased estate, also known as the dutiable value. However, estate duty applies only to estates above certain value thresholds.   

What is the estate tax exemption threshold?

In South Africa, there is a primary rebate on the first R3.5 million of a deceased estate's dutiable value. This means that the first R3.5 million is exempt from estate duty, and estates worth more than R3.5 million pay estate duty only on the value above that threshold. Estate duty is currently levied at 20% on the first R30 million of the estate's dutiable value, and at 25% on any amount above R30 million.  

When you die, your estate becomes a separate taxpayer. When your assets move from your current tax number to this new 'Estate late' tax number, a CGT liability arises in your tax return. This is because when an individual passes away, their assets are considered to have been disposed of to the Estate late at market value on the date of death, triggering a CGT liability in the name of the deceased. 

The estate could also be liable for CGT if it takes a long time to wind up, because the market value of the asset may change between the time the estate gets the asset and when it is finally distributed to the heir. If the estate cannot pay the CGT on an asset you inherit, you will have to pay it. If you later sell the asset, you will be liable for CGT if the asset increased in value.  

Lastly, donations tax is levied when you transfer assets (including money) to another person, if something of equal value is not given in return. In South Africa, donations are taxed at the same rate as estate duty: 20% for the first R30 million in donations per donor, and 25% on any donations exceeding R30 million.  

However, you may make multiple donations in a tax year and, provided that the total value doesn't exceed R100,000, you’ll pay no donations tax. Your estate planning should structure the distribution of property, other assets, and cash donations carefully, to minimise tax liabilities. Strategic use of smaller, regular donations can help you transfer wealth without incurring donations tax or estate duty.  

What is exempt from estate duty?       

• Exemptions for spouses
  This is a key feature of South African estate duty law. If you leave your assets to your surviving spouse, no estate duty is paid on those assets at your death. As mentioned, each estate has a R3.5 million rebate. However, when a deceased person has a predeceased spouse, the rebate doubles to R7 million, less any amount used by the predeceased spouse's estate.  
  
  For example, if a person died in January 2020 but had a predeceased spouse who died in 2019 and used R3 million of the rebate, the calculation of the second deceased spouse’s rebate is as follows:
  (R3.5 million × 2) less any amount used by predeceased spouse
  = R7 million less R3 million
  = R4 million is available to the second spouse's estate.  
   

• Retirement funds
  Proceeds from pension, provident, preservation, and retirement annuity funds do not fall into a deceased estate if these funds have nominated beneficiaries or dependants. The funds are paid directly to the beneficiaries and do not attract estate duty. Note: Although a retirement fund member can nominate any beneficiaries, the trustees of the retirement fund have the final say regarding distribution among financial dependants.  
  
  
  
• Living annuities
  If a living annuity does not have a nominated beneficiary, the proceeds fall into the deceased's estate, making them subject to estate duty and delays in distribution. However, if the living annuity does have a nominated beneficiary, these funds are useful estate planning tools that allow policyholders to nominate beneficiaries without needing the consent of trustees. This ensures that on their death, the proceeds are paid directly to the chosen individuals.       
  
  When the policyholder passes away, the proceeds of the living annuity bypass the winding-up process and become immediately available to the beneficiaries. This circumvents the deceased's estate and avoids estate duty. Unlike retirement funds, anyone can be nominated as a beneficiary of a living annuity, without the requirement of financial dependence.  
  
  
  
• Funeral and administration costs
  These are deductible from the estate before estate duty is calculated. This includes costs associated with the funeral service, gravestone, and certain legal and executor fees.  
  
  
  
• Debt and liabilities
  Any debt owed at the time of death, such as a bond or personal loans, is deducted from the value of the estate before estate duty is calculated.
  
  
  
• Bequests to public benefit organisations
  Bequests to registered charities or public benefit organisations may be exempt from estate duty, subject to South African Revenue Service (SARS) conditions.  

Important exemptions related to life insurance polices

Life insurance policies can offer significant estate planning benefits for individuals and businesses. Here are key exemptions:  

• Domestic life insurance policies
  The proceeds of domestic life policies are generally considered property in a deceased estate, making them subject to estate duty. However, if the proceeds accrue to the surviving spouse, they are deductible from the gross estate under section 4(q) of the Estate Duty Act. On the death of the first-dying spouse, the proceeds are paid directly to the surviving spouse (as the nominated beneficiary) and do not attract estate duty or executor's fees.
  Note: In the context of the Estate Duty Act, 'spouse' includes a permanent life partner, not only a legal spouse under the Marriage Act or the Civil Union Act.  
  
  
  
• Policies registered under an antenuptial contract
  When a domestic life policy is registered under an antenuptial or postnuptial contract and the spouse and/or child are nominated beneficiaries, the proceeds do not form part of the deceased's dutiable estate, and no estate duty or executor's fees are payable on the proceeds. Because this type of policy would need to be registered against the couple's antenuptial contract, this rule applies only to couples married in terms of the Marriage Act or the Civil Union Act.  
  
  
  
• Policies owned and paid for by a third party
  If a life insurance policy is owned and paid for by a third party, not the deceased, section (3)(3)(a) of the Estate Duty Act provides relief for the premiums paid. For example, if a son takes out a policy on his mother's life in which the son is the owner, payer, and nominated beneficiary, the proceeds of the policy will be considered property in the mother's estate, less the total premiums that the son paid towards the policy, compounded at 6% per year.  
  
  
  
• Key-person policies
  This insurance covers the life of a key individual in your business to reduce risk in case of premature death or disability. For the policy to fall outside the deceased's dutiable estate, your company must be the nominated beneficiary and pay the premiums. On the key person's death, the proceeds are paid directly to the company, bypassing the estate and avoiding estate duty. However, the company must not be a family company in relation to the insured key person.   
  
  
  
• Buy-and-sell cover
  Business co-owners can take out this cover on each other's lives so that, if a shareholder dies, the surviving shareholders can use the proceeds to buy the deceased's shares. To qualify for an estate duty exemption, the policy must be correctly structured and supported by a valid agreement among the co-owners.   

Nedbank offers estate planning products and services, including free drafting of wills and professional execution of estates. If you have been appointed as an executor and need help managing an estate, ask us to call you for expert assistance.