Estate planning: taxes after death

By Lizelle Steyn

Published 15 August 2023

When you start your investment journey, it's hard to imagine ever crossing the R3.5m line, after which estate duty kicks in. But, if you own more than just a retirement product, chances are you will, maybe even long before you reach financial freedom. My partner and I recently reviewed our Wills, which prompted me to refresh my memory around estate planning and death taxes. I share the basics here.

Retirement funds are not part of your estate

Many people include their retirement funds and annuities stemming from retirement products in their Wills, not realising that legally they don’t form part of your estate. You can’t bequeath them. These products include:

• Retirement annuities
• Pension funds
• Provident funds
• Preservation funds
• Living annuities (strictly speaking a life product)

With the pre-retirement funds, the trustees of the fund will decide who your dependents are and they have up to 12 months to complete this investigation. It’s crucial that they have your beneficiary nomination form on record to guide them.

With your living annuity, the product provider will pay the value of the investment at death directly to the nominated beneficiary, normally within a few days of notification of death. If you have a life annuity instead of a living annuity, there is no capital to inherit, only some income for a limited time - and only if you pass away within the guaranteed term.

Because these products don’t form part of your estate, no estate duty or executors’ fees are payable, making them great estate planning tools. Income tax is payable, though. In the case of a lump sum, that is payable by the estate, even though it doesn’t form part of the estate. In cases where an heir chooses an annuity income instead, the income tax is paid by the heir.

Death tax comparison

	Estate duty*	Capital gains tax*	Executors' fees
Property - primary residence	Yes	Not on first R2m gain	Yes
Property - not your primary residence	Yes	Yes	Yes
Vehicles and caravans	Yes	No	Yes
Tax-free savings account	Yes - if not wrapped in life wrapper	No	Yes - if not wrapped in life wrapper
Retirement annuity, preservation fund, employer fund	No - not part of your estate	No, but income tax applies	No
Living annuity	No - not part of your estate	No, but income tax applies	No
Life (guaranteed) compulsory annuity	No - not part of your estate	No, but income tax applies	No
Unit trusts, ETFs & shares	Yes	Yes	Yes
Life insurance - spouse as beneficiary	No	No	No
Life insurance - other beneficiary	Yes, with some exceptions	No	No
Life insurance - paid into estate	Yes	No	Yes
Endowment policy	Same as life insurance scenarios above	12% - taken care of in the product	Same as life insurance above
			Source: gofreedom.co.za | August 2023

*Assets in estate left to spouse are exempt from both estate duty and CGT

Spouses pay neither estate duty nor capital gains tax

Wills stipulating that a spouse inherits the entire estate are uncomplicated, as there will be no estate duty or capital gains tax. Considering that estate duty is normally 20% of everything above R3.5m less allowable deductions, this can turn out to be a huge saving on large estates. The spouse’s allowance is also called the section 4q deduction.

The definition of “spouse” is relatively wide and progressive in South Africa. Co-habitating life partners would need to prove this life partnership, by signing an affidavit, for example.

Capital gains tax – the easily forgotten death tax

At death, in SARS’s view it’s like all the assets of the deceased that goes into the deceased estate are being "sold" by the deceased to his/her estate, and that triggers a capital gains event. Fortunately, there are some exemptions:

• The first R2m gain on a primary residence
• Tax-free savings accounts
• All retirement products
• Depreciating assets, like vehicles and personal items.

But for share and unit trust or ETF portfolios, and all other property except the primary residence, only the first R300 000 gain on all these taxable assets combined is exempt. A large investment portfolio of someone near or beyond financial freedom/retirement could end up with a substantial capital gains tax bill at death.

Who pays for all these taxes and executors’ fees?

Other than the estate duty, capital gains tax and tax on retirement lump sums taken by beneficiaries, there’s also executors’ fees to be paid. In South Africa, the executors’ fee is currently capped at 3.5% excl VAT. All of this needs to be paid by the executor out of the estate. Where there’s not enough cash in the estate or not enough investments that can be sold to generate the cash, heirs of immovavale property or sentimental items can step in and pay the taxes and fees to avoid the sale of that property or items to strangers. To avoid a tricky situarion like this scenario, you can buy life insurance with your estate as the beneficiary to make sure there will be enough cash in your estate. Be aware though, this amount will increase the estate duty and fees to the executor.

Any products that will be free of all taxes and executors' fees?

Yes, there's the option of a tax-free savings account wrapped in a life policy with your spouse as beneficiary (Allan Gray and Fedgroup offer these). Also, although not strictly an asset, life insurance with your spouse as the sole beneficiary attracts no death taxes or executors' fees.

The good news around death and taxes is that you can cut out large chunks of these costs payable from the estate with careful planning. Hope you find the table comparing the taxes and executors' fees for different assets useful.