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The basics of Estate Duty

The basics of Estate Duty

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When a person dies, they leave behind an estate which includes everything they own. Estate Duty is payable on the estate of every person who dies and whose net estate is in excess of R3,5 million. It is charged at the rate of 20%. Should your Estate be R30 million or more the Estate duty will be 25%.

How does an estate get reported to SARS?

Even if Estate Duty does not apply to you, it is still necessary to inform SARS that the person is deceased. It is recommended that you consult with a legal expert when going through such as process.

Copies of the following documents must be sent to SARS:

  • Death certificate or death notice.
  • Identity document of the deceased.
  • Letters of Executorship (J238) (if applicable).
  • Letter of Authority (J170) (in cases where the estate is less than R250 000).
  • Certified copy of the executor’s identity document.
  • Power of attorney(if applicable).
  • The name, address and contact details of the executoror agent.
  • The last Will and Testament of the deceased.
  • An inventory of the deceased’s assets.
  • The liquidation and distribution accounts (if available).

These documents may be sent to the relevant Centralised Processing Centres that is closest to the Master of the High Court where the estate is being administered.

How does Estate Duty work in relation to an inheritance?

All income received or accrued before the deceased’s death is taxable in the hands of the deceased up until the date of death, and will be administered by the executor or administrator acting as the deceased’s representative taxpayer.

  • After the date of death of a person, a new taxable entity comes into existence – the “estate”.
  • The assets of the deceased will be held by the estate until the liquidation and distribution account has lain for inspection and become final under section 35(12) of the Administration of Estates Act after which the assets will be either handed over to the heirs or delivered to the trustee of a trust estate.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

How does the Budget Speech affect you, your property transactions and your estate?

How does the Budget Speech affect you, your property transactions and your estate?

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On 21 February 2018, Finance Minister Malusi Gigaba delivered his 2018 Budget Speech.

Hereby a summary of the most significant proposals for the 2018/2019 Budget as tabled by the Minister of Finance:

2018/2019 Tax Proposals:

  •  VAT: A one percentage point (1%) increase in VAT from 14% to 15%.
  • No adjustments to the top four income tax brackets. Below inflation adjustments to the bottom three income tax brackets proposed.
  • Fuel Levies: Overall increase of 52c/litre for fuel, consisting of a 22c/litre increase in the general fuel levy and 30c/litre increase in the Road Accident Fund levy, effective 4 April 2018.
  • Luxury Goods Tax: Increase in the ad-valorem excise duties rate on luxury goods from 7% to 9% effective 1 April 2018.
  • Estate Duty Tax: Increased estate duty, to be levied at 25% for estates above R30 million, effective 1 March 2018. This is a 5% increase.
  • Capital Gains and Dividend Tax: The capital gains tax rate for individuals remains unchanged at 18%, while the dividends tax rate remains unchanged at 20%.
  • Medical Tax Credits: The medical tax credits will increase from R303 to R310 per month for the first two beneficiaries (2.3% increase), and from R204 to R209 per month for the remaining beneficiaries (2.5% increase).
  • Sin Tax: Excise duties on tobacco products will increase by 8.5% and on alcohol by 6-10%.
  • Environmental & Health Tax: Increases in the plastic bag levy, the motor vehicle emissions tax and the levy on incandescent light bulbs to promote eco-friendly choices.

 

Transfer Duty Fees:

Transfer duty fees have remained unchanged. The following rates on transactions in respect of acquisition of property is payable (and not subject to VAT). 

Value of Property (R) Rate
0 – 900 000 0%
900 001 – 1 250 000 3% of the value above 900 000
1 250 001 – 1 750 000 10 500 + 6% of the value above 1 250 000
1 750 001 – 2 250 000 40 500 + 8% of the value above 1 750 000
2 250 001 – 10 000 000 80 500 + 11% of the value above 2 250 000
10 000 001 and above 933 000 + 13% of the value above 10 000 000

 

Estate Duty Tax:

The 2018 Budget proposes to increase estate duty from 20% to 25% for estates worth R30 million and more. This is in line with Davis Tax Committee recommendations, and in keeping with the progressive structure of the tax system. Any donations above R30 million in one tax year will be taxed at 25%, in order to limit the staggering of donations and avoid the higher estate duty rate. Both measures will be effective from 1 March 2018.

Estate duty is levied on property of residents and South African property of non-residents less allowable deductions. The duty is levied on the dutiable value of an estate at a rate of 20% on the first R30 million and at a rate of 25% above R30 million. A basic deduction of R3.5 million is allowed in the determination of an estate’s liability for estate duty as well as deductions for liabilities, bequests to public benefit organisations and property accruing to surviving spouses.

 

JLJ_BudgetInfograph

Demystifying the executor in a deceased estate

Demystifying the executor in a deceased estate

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During a person’s lifetime s/he will gather assets, in other words, belongings such as a house or a motor vehicle. These assets and liabilities will form part of a person’s estate. At the death of that person, his/her deceased estate must be administered, in other words, divided, distributed and controlled by someone. This person is called an executor.

However, the role of an estate executor and who can be appointed as one has been largely misunderstood.

What does the executor do?

“Executor” is the legal term for referring to the person, or people, nominated in your will to carry out the directives you set out in your will.

  1. This means that it is the executor’s responsibility to disburse your property to the mentioned beneficiaries in your will, but also obtain information on potential heirs, collecting and arranging payments, and approving or disapproving creditors’ claims.
  2. It is the executor’s duty to calculate and pay the estate tax, and to ensure that the correct documentation is filed with the relevant authorities.
  3. The executor is the individual that represents your estate.

Who can be appointed as the executor?

It has become normal to appoint a friend, family member or beneficiary to act as the executor, as they most likely have intimate knowledge of your estate and your affairs, but also, they will not rack up the fees that a legal body might accrue.

However, there is a misconception that you can avoid the fees by appointing a family member as the estate executor, but this could also mean that you are deferring the cost to the nominated family member.

  1. Family members appointed as executors on larger estates immediately find themselves out of their depth, and not only end up hiring a professional executor, but may also pay more for these services than necessary.
  2. A simple way to address this is by appointing a “professional” executor during your lifetime. This allows you to negotiate the executor fees.

If you appoint a family member, make sure that they understand that they will have to appoint a professional agent, and that they should negotiate the fee and be very cautious of agreeing to a fee arrangement in terms of which the professional agent charges their professional fee, instead of the legislated scale.

References:

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
WHO SHOULD YOU ASK TO BE EXECUTOR OF YOUR ESTATE?

WHO SHOULD YOU ASK TO BE EXECUTOR OF YOUR ESTATE?

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If you have a valid will it is of grave importance to mention who you want to appoint as executor. But the question always arises, who? John O. McManus, an estate attorney in New York City said this – “If you appoint someone you love as executor, get your house in order. Otherwise, appoint someone you do not”. And he was not speaking in jest.

As much as we wish this wasn’t true, an executor has a real tough responsibility of carrying out all the directives of a final will and testament. He’s not only responsible for dividing the property to the mentioned beneficiaries, but also to obtain information on potential heirs, collect and arrange payments, and approve or disapprove creditors’ claims, and more if the will is complicated.

Choosing an executor

Deciding on who will be your executor should be done very carefully, especially since that person will be in charge of your last wishes when you’re gone. Many people choose their closest relatives, often someone with a law degree or an accounting background. Though this might be a good choice, you need to be aware that the administration of a deceased estate can be a daunting task, not to mention time consuming and often frustrating.

It has become standard practice to appoint a family member or friend as the executor, especially if you want to save a few bucks. They might not have the knowledge or capabilities to do the job. It could cause undue heartache and stress, as well as have unprepared for financial implications, should they need to hire a professional executor to take over the administration process.

If your desire is to nominate your spouse as executor, you might want to reconsider.  It makes sense for your spouse to be in control, especially if you shared many happy years together. However, if you have both agreed that your spouse would be the best person for the job, it is strongly advised to appoint an attorney or administrator to assist, just in case your spouse is in no state to deal with everything by themselves. After all, your spouse will be affected more than anyone else by your death, and trauma like losing a life partner can take its toll.

You might also need to consider that your spouse could pass away before you do.  There is also the possibility of divorce. Life can change in an instant and we all need to be prepared.

If you don’t nominate an executor, the court will appoint one for you and that person might not be an ideal choice. Be sure to update your will and your executor should any major changes occur.

So what would be your best option?

It is highly recommended to have legal counsel and financial advice. South African courts prefer it if you seek outside professional help when making important decisions about estate assets, especially if the estate is large.

You don’t only need to nominate one executor in your will. Consider nominating a few responsible independent individuals, and include an attorney or administrator to deal with the legal matters.  It will put your mind at ease and take some strain off your loved ones.

Should your choice be a family member or friend, make sure you have discussed this with them beforehand so that they are aware of the process. In fact, find out how the process works and ensure both you and the person you want to nominate understands the role of an executor. Knowing the process will just make it easier for them, or they might decide otherwise.

If you do decide to appoint a professional executor or administrator, you could negotiate the executor fees and have this included in your will as a condition.

Furthermore, save the family possible disputes by being as specific as possible with regards to your personal belongings – such as photo albums and other sentimental and valuable collections. Your will should direct what happens to all personal property, but remember in situations where there’s a question of who should receive something, the executor has the final say.

Whatever your decision, keep in mind a professional executor and/or administrator will make the process so much quicker and smoother, and allow everyone peace of mind. Our main aim is to make it easier for your family and friends in their time of loss. We advise that you go through your will and ensure things are in place for the sake of your loved ones.

Read about what we can do for you on our website – https://www.probatessa.co.za/probates-services.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

How is a deceased’s estate administered?

How is a deceased’s estate administered?

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The administering of a deceased estate is regulated by the Administration of Estates Act No 66 of 1965 (as amended) and divided according to a valid will or the Intestate Succession Act No 81 of 1987 (as amended) or a combination of both acts.

Various other acts and regulations may, however, also be applicable, like those applicable to income tax (with due allowance for VAT and CGT), Estate duty and Donations tax, and support of surviving spouse.

After a death

When someone dies, his/her estate must be reported to the Master of the High Court as soon as possible, and certain report documents, together with the original will, where applicable, should be delivered to the Master.

In the case of estates with a gross value of less than R250 000 the Master may dispense with an official appointment of an Executor to execute the required administering process. In all other cases, an Executor will be appointed by the Master, who will issue an Executor’s letter to the appointed Executor.

The Executor

As soon as the Executor’s letter has been issued the formal administering of the estate, which the Executor has to follow, will commence. One of the Executor’s first tasks would be to announce to the creditors, acquire details regarding estate assets and have it valued if necessary, and recover certain assets. Known and filed liabilities should be investigated and attention must be paid to income tax.

The Executor is now compelled to submit a liquidation and distribution account (statement of assets and liabilities) to the Master of the High Court within six months after being issued with the Executor’s letter, or ask for a formal postponement. This estate account will indicate all assets and liabilities, distribution of heirs and details of assets outside the estate which are directly payable to beneficiaries.

The Master will check the estate account and then issue a questionnaire to the Executor. As soon as the Master has granted approval the Executor may proceed to announce the account as being open for inspection for 21 days at the Master and the nearest Magistrate’s Office.

Should any written challenges be submitted, it should be dealt with according to the regulations in the Administration of Estates Act. Should there be no challenges, or when the Executor has disposed of all challenges, the Executor may proceed to make payments to heirs and carry over any other assets to the beneficiaries.

Administering obstacles

In most cases the administering process should not be complicated, therefore it would be possible to finalise within a fair period of time (approximately six to nine months). There are, however, many obstacles which may slow down this process and even bring the administering process to a virtual standstill. Some of the most well-known and general obstacles are poor service from government and private institutions, invalid and unpractical wills, shortage of cash, quarrels and disputes among family members and beneficiaries, lack of information, disorder in the tax and other affairs of the deceased, lawsuits before and after death, and legal post-mortems in case of an unnatural death, which may sometimes be required before policies can be paid out.

Conclusion

The administering of an estate is a specialised environment which should be left to capable people with knowledge of the Administration of Estates Act and years of experience. Ignorance regarding the run of events as well as errors of judgement may eventually cost you dearly if you don’t make use of the available expertise.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Pitfalls of appointing the surviving spouse as executor/trix:

Pitfalls of appointing the surviving spouse as executor/trix:

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The appointment of the surviving spouse as executor seems to be the honourable and correct thing to do. This in particular where the deceased died without leaving a valid will, or failed to nominate an executor/trix in the last will and testament.

The fact that the surviving spouse normally doesn’t have to provide the Master with security and that it seems to be the next best thing can often become your worst nightmare.

This in particular the case where the spouse is the second or third wife and the deceased divorced wife and children are still around, alternatively where her/his own children will compete for inheritance in the intestate succession.

The problem comes when particularly maintenance claims are submitted against the estate of the deceased by the divorced spouse or children.

It leaves the Surviving spouse in the predicament of rejecting these claims, because it is almost always financially beneficial to do so.

This however is where the clash of interest manifests itself and where cool heads and caution is required.

The remedies available are limited and consist of the following:

• Enter into a suitable redistribution agreement if possible. (possible but difficult with minors)

• Negotiate a suitable solution to all parties.

• Resign as executor/trix and appoint an independent individual. This is the most common and used method, but often goes with a lot of emotion and costs.

• Bear in mind the newly appointed executor will almost always need to provide security, and finds himself in a hot seat to make the correct decision without favouring any party to this dilemma.

With the above in mind it is always good practice to foresee where possible, the potential of a clash of interest and to steer clear of this from the offset.

What is the cost of my estate duty?

What is the cost of my estate duty?

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In terms of the stipulations of section 4 of the Estate Duty Act No 45 of 1955 certain deductions from the value of an estate are allowed in order to determine the final value of the estate which will be subject to estate duty.

The following two rebates are the most well-known:

  • Section 4(q) – This is the total value of all the benefits bequeathed to the surviving spouse. The value of a usufruct also qualifies as an Article 4(q) rebate; and
  • Section 4A – This is the value of the rebate applied to all estates, which is currently R3.5 million.

Given the value of the section 4A rebate you can rest assured that your estate will not be accountable for estate duty if the net value (assets minus liabilities) is less than R3.5 million. The amount with which your estate exceeds R3.5 million will, however, be taxable for estate duty at 20%.

The Taxation Laws Amendment Act, 2010, amended the section 4A rebate by allowing the part of the R3.5 million rebate not used by the estate of the first deceased spouse to be carried over to the estate of the surviving spouse. This amendment applies to the estates of individuals passing away after 1 January 2010.

The carried over rebate between spouses can be illustrated with the following example:

  • Mr A, who is married to Mrs A, passes away. The net value of his estate is R800 000 after the rebate according to Article 4(q) has been calculated.
  • This amount is bequeathed to his children and therefore not deductible for estate duty.
  • There is no accountability for estate duty as Mr A’s estate only used R800 000 of the section 4A rebate of R3.5 million.
  • At Mrs A’s passing the net value of her estate is R8 million. The following rebate is applicable to her estate: Section 4A rebate to the value of R7 million minus the R800 000 deduction already utilised in the estate of Mr A.
  • Mrs A’s estate will therefore pay estate duty on R1.8 million (R8 million minus R6.2 million).
  • R1.8 million @ 20% = R360 000.

We have to put the utmost stress on the importance of estate planning and a will which gives you the best benefits regarding the composition of your assets and liabilities should the net value of your estate exceed R3.5 million. This does not mean that the use of trusts becomes obsolete in estate planning due to the larger rebate in the surviving spouse’s estate. There are still valid reasons why the bequeathment of a trust by the first deceased is an excellent option, even though it does not initially effect a saving in estate duty. In case of such a trust the assets can be managed by the trustees to the benefit of the surviving spouse and children. A small effort today for much peace of mind tomorrow!

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Is it beneficial to create a Trust?

Is it beneficial to create a Trust?

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A Trust can be described as a legal relationship which has been created by the founder, who places assets under the control of Trustees. This either happens during the founder’s lifetime (inter vivos trust) or at the death of the founder (testamentary trust). This article will focus on the advantages and disadvantages of an inter vivos trust.

The advantage of a trust is firstly, that inter vivos trusts can be used to minimise estate duty. No estate duty should be payable on assets owned by the Trust as a Trust does not terminate or come to an end, since it has perpetual succession. Estate duty is currently taxed at 20% of the gross estate value. This saving in estate duty can be substantially large, especially for high net worth individuals who are worth millions of rands. Secondly, as the Trust’s assets are not owned by the beneficiaries, the creditors of the beneficiaries do not have a claim regarding the assets of the Trust. This advantage is especially important for people who are exposed to potential liability. Companies as well as individuals are able to transfer assets to Trusts. Lastly, because Trusts have perpetual succession, beneficiaries will be able to continue enjoying the benefit of the Trust assets even if one of the Trustees were to pass away.

The disadvantages are firstly, the costs of setting up a Trust, which can be high. It may cost up to R 20 000 to set up a Trust. If immovable property is transferred to the Trust then transfer duty needs to be paid. The founders of the Trust may also be liable to pay Donations tax, which is taxable at 20% of the value of the assets transferred to the Trust. Transfer duty is taxed according to a sliding scale. Secondly, Trustees could find themselves personally liable for losses suffered by the Trust if it can be proven that they did not act with care, diligence and skill in terms of section 9 of the Trust Property Control Act. It is important to note that “skill” requires more than just acting in good faith. Trustees may be proven to be negligent not only if they invested in risky investments, but also if they invested capital too conservatively, causing the capital not to grow sufficiently. Trustees also need to be aware of the fact that they can still be held liable if only one Trustee has signing power on behalf of the Trust and he/she makes a poor decision that holds all the Trustees liable for his negligence.

The founder of the Trust needs to recognise that the assets in the Trust do not belong to him/her anymore. The assets belong to the Trust. Should this loss of control (from founder to Trust) not occur, the Trust may be seen as an alter ego of the founder, which could result in the assets being included in creditors’ claims as well as having estate duty consequences.

The earnings from the assets in the Trust are taxed at 40%, and interest exemptions do not apply to Trusts. Also, the inclusion rate for Capital Gains tax for an inter vivos trust is 66.6% whereas the inclusion rate for individuals is 33.3%. Lastly, as we can see from the above, a Trust is not for everyone.

It is important to weigh up the advantages and disadvantages before deciding whether to go ahead or not. The best decision would be to speak to a certified financial planner or attorney who can assist you in making the correct decision regarding your personal situation.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

What you need to know about estate planning

What you need to know about estate planning

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The main aim of planning your estate is to ensure that as much of the accumulated wealth is utilised for your own benefit and for the benefit of your dependents on your death.

What is estate planning?

“Estate planning” has been defined as the process of creating and managing a programme that is designed to:

  1. Preserve, increase and protect your assets during your lifetime;
  1. Ensure the most effective and beneficial distribution thereof to succeeding generations.

It is a common misconception that it revolves solely around the making of a Last Will and Testament, or the structuring of affairs so as to reduce estate duty. Each person’s estate is unique and should be structured according to his/her own unique set of circumstances, goals and objectives.

What is liquidity?

The lack of liquidity on the date of death may cause for the deceased’s family members and dependents to suffer hardship, as certain assets might be sold by the executor to generate the cash needed.

Liquidity means that there should be enough cash funds to provide for:

  1. Paying estate duty;
  1. Settling estate liabilities and administration costs;
  1. Providing for other taxation liabilities that may arise at death, such as capital gains tax.

Technically the estate is frozen until such time as the Master of the High Court has issued Letters of Executorship.

Having no will…

If you die without executing a valid Last Will and Testament, your estate will be dealt with as an intestate estate, and the laws relating to intestate succession will apply. The Intestate Succession Act determines that the surviving spouse will inherit the greater of R250 000 or a child’s share. A child’s share is determined by dividing the total value of the estate by the number of the children and the surviving spouse. If the spouses were married in community of property, one half of the estate goes to the surviving spouse as a consequence of the marriage, and the other half devolves according to the rules of intestate succession. If there is no surviving spouse or dependents, the estate is divided between the parents and/or siblings. In the absence of parents or siblings, the estate is divided between the nearest blood relatives.

The executor remuneration

Executor’s remuneration is subject to VAT where the executor is registered as a vendor.

Where the value of the estate exceeds R3.5 million, estate duty will become payable on the balance in excess of R3.5 million, with the exception of the property bequeathed to a surviving spouse, which is exempt from estate duty and/or capital gains tax.

Land

Section 3 of the Subdivision of Agricultural Land Act prevents the subdivision of agricultural land, and such land being registered in undivided shares in more than one person’s name is subject to Ministerial approval.

Minor children

A minor child is a person under the age of 18 years of age. Any funds bequeathed to a minor child will be held by the Guardian’s Fund, which falls under the administration of the Master of the High Court. These funds are not freely accessible, and are usually invested at below market interest rates. It is thus advisable to provide for minors by means of a trust.

Member’s interest

The Close Corporations Act provides that, subject to the association agreement, where an heir is to inherit a member’s interest (in terms of the deceased’s Will), the consent of the remaining members (if any) must be obtained. If no consent is given within 28 days after it was requested by the executor, then the executor is forced to sell the member's interest.

Estate duty

Section 3(3)(d) of Estate Duty Act determines that where an asset is transferred to a trust during an estate planner’s lifetime, yet the estate planner, as trustee of the trust retains such power as would allow him to dispose of the trust asset(s) unilaterally for his own or his beneficiaries' benefit during his lifetime, then such asset(s) may be deemed to be property of the estate planner and included in his estate for estate duty purposes.

In community of property

Where the parties are married in community of property, the surviving spouse will have a claim for 50 percent of the value of the combined estate, thus reducing the actual value of the estate by 50 percent. The estate is divided after all the debts have been settled in a deceased estate (not including burial costs and estate duty, as these are the sole obligations of the deceased and not the joint estate). Only half of any assets can be bequeathed.

Life insurance

The proceeds from life insurance policies can be used to:

  1. Generate income to maintain dependents while the estate is dealt with;
  1. Pay estate expenses: funeral, income tax, estate administration, estate duty.

All proceeds of South African “domestic” policies taken out on the estate planner’s life, where there is no beneficiary nominated on the policy, will fall into his estate on his death.

Where a beneficiary is nominated on the policy, the proceeds will be deemed property for estate duty purposes, even though they are paid directly to the beneficiary (subject to partial exemptions based on policy premiums).

Policies which are exempted from inclusion for estate duty purposes are buy and sell, key man policies, and those policies ceded to a spouse or child in terms of an antenuptial contract.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)