By Sherry Tapfuma
One of the key objectives of estate planning is to reduce estate duty liabilities, ensuring that more of your wealth is passed on to your loved ones.
In South Africa, estate duty is 20% on estates up to R30 million and 25% on anything above that.
However, the first R3.5 million of your estate is tax-free (this is called the Section 4A abatement), and if you are married, anything left to your spouse is also exempt.
With this in mind, it’s important to know that certain assets, when properly structured, are exempt from estate duty, providing liquidity and financial security to beneficiaries. Here’s how you can use these mechanisms to maximise your legacy.
Retirement funds: a built-in tax advantage
Proceeds from compulsory retirement funds do not form part of a deceased estate and are therefore exempt from estate duty.
These funds fall under the Pension Funds Act, which governs their distribution through Section 37C. While members can nominate beneficiaries, the final decision rests with the trustees, who must ensure that financial dependants, including spouses, children, and other dependants, are adequately provided for.
Because retirement fund benefits bypass the estate, they are not subject to executor’s fees or estate duty.
However, since the fund trustees decide on the allocation, you may need to consider additional liquidity sources to ensure immediate financial support for your loved ones after your passing.
Living annuities: direct payout to beneficiaries
Living annuities offer estate duty benefits and flexibility in beneficiary nomination.
Upon the policyholder’s death, the proceeds are paid directly to the named beneficiaries, avoiding estate duty and the estate administration process.
Upon the death of the annuitant, beneficiaries can choose to:
- Withdraw the full amount (subject to income tax).
- Transfer the funds into a new living annuity in their name.
- Take a partial withdrawal (up to the tax-free threshold of R550 000, if applicable) and reinvest the remaining balance.
If no beneficiary is named, the proceeds will be paid into the deceased estate and, while exempt from estate duty, executors may charge fees on these funds.
Buy-and-sell assurance: protecting business interests
Buy-and-sell assurance is a vital tool for business owners, ensuring that the deceased’s shares in a company are smoothly transferred to surviving shareholders.
To qualify for an estate duty exemption, the policy must be:
- Owned by a co-owner of the business.
- Used exclusively for purchasing the deceased’s shares.
- Funded entirely by the surviving shareholders (the deceased must never have paid the premiums).
- Supported by a formal buy-and-sell agreement.
A well-structured buy-and-sell policy not only exempts proceeds from estate duty but also ensures business continuity, preventing financial strain on heirs and business partners.
Key person assurance: safeguarding a business’s future
Key person assurance protects businesses against the financial impact of losing a crucial employee, partner, or executive.
If structured correctly, these policies can also be estate duty-exempt. For exemption, the policy must:
- Be owned by the company.
- Have the company as the beneficiary.
- Be paid for by the company.
Funds from key person assurance are paid directly to the business, ensuring financial stability while avoiding estate duty. However, if the company is classified as a “family company” in relation to the life assured, the exemption may not apply.
Life insurance: spouse beneficiary exemption
Domestic life insurance policies are typically included in the deceased estate and subject to estate duty. However, Section 4(q) of the Estate Duty Act provides a full exemption if the proceeds are paid directly to a surviving spouse or life partner.
To qualify:
- The spouse or life partner must be the named beneficiary.
- The policy proceeds must accrue directly to the spouse, not via the estate.
Additionally, if a life policy is registered against an ante-nuptial or post-nuptial contract, with the spouse or minor children as beneficiaries, it is also exempt from estate duty, although keep in mind that this exemption only applies to legally married couples under the Marriage Act or Civil Union Act, not life partners.
By carefully structuring your assets and policies, you can minimise estate duty and enhance the financial security of your loved ones. By leveraging tax-efficient mechanisms such as retirement funds, living annuities, buy-and-sell agreements, and key person assurance, you can optimise your estate planning and provide lasting financial stability for your beneficiaries.
Tapfuma is a Certified Financial Planner professional at Crue Invest.
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