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Estate planning, fact or fiction?
06 May 2020  | Simei Verster

With the budget speech in the rear-view mirror, South Africans are having mixed feelings about the receiver. On the one hand, transfer duties have been made nil up until R1 million of the property value. On the other hand, sin tax has greatly increased. Even after you are deceased, the receiver still wants its share. This is called Estate duty. It is a form of tax that is levied against a deceased’s estate which exceeds R3 million.  

Estate planning is there to ensure that nothing is left up to chance and that no unforeseen circumstances leave your loved ones in a sticky situation. One of those sticky situations can be paying estate duty.  Many practitioners use estate planning mechanisms to minimize estate duty. An example of this is: when you take out any type of insurance policy or you invest in a pension fund, you are required to nominate beneficiaries. Therefore, because beneficiaries are already nominated, the policy or fund is not mentioned in the will of the testator. Although this is an effective estate planning mechanism, there are two things that should be taken note of.

The testamentary trust

If the testator has minor children, he/she may create a testamentary trust that requires the inheritance of certain beneficiaries to be held in trust until the beneficiaries reach a certain age. If that testator has life policies or a pension fund, he/she may nominate the said minors as beneficiaries of the policy or fund. The issue is that in the event that the testator dies before the beneficiaries reach the age of majority, the fund or policy is not governed by the will. The money from the policy will be paid out straight to the minor, and in effect will make the operation of that testamentary trust ineffective.

There is a way to prevent this, however. The testator would have to make the testamentary trust the beneficiary of the said policy and fund. Thereby ensuring that the policy pays out to the testamentary trust and keeping the funds in trust until the beneficiaries reach the age of majority.

Estate duty is in fact not minimised

Many people believe that because the policy is not mentioned in the will, it does not form part of the assets of the estate, and thereby will not add to the possibility of paying estate duty. However, when the liquidation and distribution account is drawn up, there is the need to name claims in favour of the estate. These include monies owed to the deceased estate, policies, investments, pension funds and the like. Therefore, that amount is considered, and will add to the possibility of having to pay estate duty. The only fee which is spared is the executors fee of 3.5% on that policy/fund.

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