In this advice column Geraldine MacPherson from Liberty answers a question from a reader who has questions around structuring his estate.
Q: I have some questions regarding estate planning . What I need to know is whether there is enough cash in my and wife’s estate to pay the estate duty and executors fees.
In order for me to make adequate provision for the costs associated with dealing with our affairs, I would like to get an estimate of the estate duty and executor’s fees.
My questions are as follows. When determining the value of the estate on which the estate duty and executor’s fees are based:
- Are assets such as property and motor vehicles valued at purchase price or at market value? If the latter, who determines the market value and on what basis?
The value of the assets is based on their market value, which the executor is tasked with determining. When it comes to assets such as immovable property, an appraiser appointed in terms of the Administration of Deceased Estates Act will have to be used and the estate will have to pay this person’s fees.
Practically, the car’s value will be the book value, unless it is sold, in which case it will be the actual sale price. Note that the Master can insist on an appraiser valuing any property (not only immovable property) if he has reason to believe that the value provided by the executor is not reasonable.
- Are life insurance policies included in the assets as deemed property a) for the purposes of calculating executor’s fees; and b) for the purposes of calculating estate duty?
If a beneficiary has been nominated then the policy benefits will pay directly to the beneficiary and will not fall into the estate. The executor will therefore not be eligible to charge his fee on the amount and it will attract no estate duties.
If, however, no beneficiary is nominated or the estate is nominated as the beneficiary, then the benefits will fall into the estate, under the administration of the executor and he will charge his fee accordingly.
In such a case, the benefits will also be taken into account when calculating estate duty, unless the life insurance policy is exempt in terms of the provisions of the Estate Duty Act, or accrues to the surviving spouse. Interestingly, it is the person who receives the benefits who will have to actually pay the estate duty attributed to the policy benefits.
The types of policies that are exempt are certain employer owned policies, such as certain keyman policies, certain buy and sell policies, and policies that have been taken out to meet a requirement in an ante nuptial contract. In addition, any benefits, including death benefits from long term insurance policies that accrue to a surviving spouse, qualify as a deduction when it comes to estate duty under section 4(q) of the Act, thus no estate will be attributed to those policies.
- I have a retirement income fund (living annuity). Is this included in the assets of the estate for the purposes of a) calculating the executor’s fees; and b) for the purposes of calculating estate duty? If so, what value is given to this retirement funding given that it is pre-tax money?
If you have nominated a beneficiary for the annuity, then the benefit will pay directly to that beneficiary and it will not be included in the estate. The executor will therefore not be eligible for a fee on it. If no beneficiary is nominated, then the benefit will be paid to the deceased’s estate, as a lump sum.
This lump sum will attract retirement tax in the deceased’s hands, and the after tax benefit will be paid to the estate. The executor will then deal with this asset and will accordingly charge his fee.
In terms of current legislation, the benefits in an approved retirement fund or compulsory annuity are exempt from estate duty. This may change to some extent going forward, as National Treasury intends to include any “disallowed contributions” for estate duty purposes. We only have draft legislation on this at this point in time, so we do not know for certain how this will actually play out.
- From what I have read, the entire estate from the first spouse to pass away can be transferred to the surviving spouse with no estate duty being payable. Also, the first R3.5 million of the value of the estate is exempt from estate duty. My wife and my wills, which were drawn up some time ago, specify that the first R3.5 million of our estates is transferred to our family trust. This means that the second of us to pass away will have R7 million exempt from estate duty. However, I have read more recently that the R3.5 million exemption is automatically transferred to the surviving spouse, so is there any need to transfer the second R3.5 million to a trust?
You are correct that the abatement now automatically rolls over to the surviving spouse, unless used on the death of the first dying spouse. So, if the first dying spouse leaves his or her entire estate to the survivor, then on the survivor’s death estate duty is only levied on the estate in excess of R7 million.
It is therefore true to say that the abatement is no longer lost if not used on the death of the first spouse. But, what must be kept in mind is that the potential growth on the R3.5 million may well be lost.
If R3.5 million is bequeathed to the family trust and invested, when the surviving spouse passes away, then R3.5 million could have enjoyed good growth and now be worth more. If it had not been bequeathed to the trust and invested, it would remain R3.5 million.
Overall, when looking at your estate planning it is essential to ensure that the surviving spouse is adequately catered for. He or she must have sufficient capital after all the taxes and administration expenses have been paid to enjoy a comfortable standard of living.
If bequeathing the R3.5 million to the family trust (or adult children) results in his or her standard of living being adversely impacted, then this should not be the route selected. However, if there is more than enough cash in the estate, and the bequest poses no risk at all to the surviving spouse, then it still has merit as an estate planning tool.
Geraldine MacPherson is a legal adviser at Liberty Life in Johannesburg