Estate planning: Mechanisms to maximise wealth transference (2024)

Effective estate planning involves making full use of the mechanisms available to you when structuring your affairs and planning the transference of wealth to your loved ones. Like a cog, an estate plan has many moving parts that must work together to achieve a pre-determined set of succession goals.

In this article, we explore several useful estate planning mechanisms to assist in the smooth transfer of wealth.

Living annuities

Where beneficiaries have been nominated on the investment, funds housed in a living annuity do not form part of your deceased estate and can be efficiently transferred to your loved ones in the event of your death. Unlike in the case of pre-retirement funding vehicles, living annuities permit investors to nominate beneficiaries for the investment and upon the death of the policyholder, the funds will be paid in accordance with the beneficiary nomination.In such circ*mstances, the living annuity assets will not attract estate duty (assuming the source funds qualified as a tax deduction) and as the funds have bypassed the deceased estate, no executor’s fee may be charged on the value.

On the other hand, where an investor has not nominated a beneficiary for their living annuity, note that the proceeds will be paid into the deceased estate, and while not attracting estate duty, the executor is permitted to charge fees on the value of the assets.

Where beneficiaries have been nominated to a living annuity, they have the option to make a full or partial withdrawal of the capital subject to tax as per the retirement tax tables. Alternatively, the beneficiaries can keep the annuity in their names with the option of adjusting the drawdown rates and underlying investment portfolio in line with their needs.

Good to know: It is possible to nominate a trust as a beneficiary to a living annuity, which is particularly useful if you intend to leave the proceeds to minor beneficiaries.

Life insurance policies

Life insurance policies can be particularly useful for creating liquidity in your estate and making financial provision for your loved ones. However, as with other estate planning tools, it is important to structure your policy appropriately for its intended purposes. Remember, the proceeds of life policies are considered deemed property in a deceased estate (with ‘deemed property’ referring to any benefit received because of the death of the deceased). As such, the value of the deceased’s life policies will be taken into account for estate duty purposes, except in the case of the proceeds from domestic key person and business assurance policies, which if correctly structured, are exempted from estate duty.

In calculating the appropriate level of life cover required, it is therefore important to take into account factors such as how much debt would need to be covered in the event of your death, your estate duties and taxes, and the extent to which you would need to provide for your loved ones. Insufficient liquidity in your estate may result in your executor having to realise assets otherwise intended for your heirs.

Good to know: Deemed property refers to any benefit received or that becomes due because of the death of the deceased.

Trusts

Trusts make excellent estate planning tools as they can serve to both protect assets intended for your loved ones and reduce taxes, with certain trusts also enjoying protection from creditors. However, a trust must be correctly set up for the right purposes and in the right manner to ensure its validity.

A testamentary trust, which is set up in terms of your will, is the most widely used trust in South Africa and can be used to protect the assets bequeathed to a surviving spouse, minor children or children with special needs. Many estate planners make use of inter vivos trusts to house growth assets such as property or shares as they provide an effective means of transferring assets down generations, reducing estate duty, and keeping assets safe from creditors.

When it comes to reducing estate duty, transferring immovable property into an inter vivos trust ensures that any growth in the value of the property is contained within the trust and does not accrue in your personal estate. However, saving on taxes and estate costs should not be the overriding reason to form an inter vivos trust, and the estate planner must be clear about their intentions before forming a trust.

Generally speaking, property should only be moved into a trust if it is the estate planner’s intention to keep the property for a longer period of time or if the intention is to protect the assets from creditors.

Good to know: There are also costs involved in setting up and running trusts, and these costs need to be weighed up against the benefits of having the trust to ensure that it makes financial and practical sense.

Bequests

Bequests made in terms of your will are an effective way of ensuring that a named individual (or set of individuals) receives a specific asset or benefit after your passing. The beneficiary of a special bequest made in a will, also known as a legatee, must be clearly identified, as should the assets that you intend to bequeath to the legatee, to avoid confusion or uncertainty.

That said, the order in which assets in a deceased estate are distributed is an important factor to take into account when drafting one’s will – keeping in mind that once the executor has settled the estate’s debts, they are required to distribute any special bequests made in terms of the will. Only once these bequests have been honoured will the residue of the estate devolve on one’s heirs.

As such, if you intend to make special bequests in your will, it is vital to ensure that there is sufficient liquidity in your deceased estate to honour those bequests without needing to realise assets intended for one’s heirs.

Good to know: Be careful of bequeathing an encumbered asset (for instance, a bonded property), as this could have unintended consequences for your heirs, especially if the executor has to settle the bond from the residue of the estate.

Donations

Donations made during one’s lifetime can be used effectively to reduce your estate duty liability, although it’s essential to employ a well-thought-out strategy if taking this approach as there may be donations tax implications involved.

Donations are regulated by the Income Tax Act and are subject to donations tax at a flat rate of 20% of the value of the donation not exceeding R30 million and 25% on the value exceeding this amount – subject to a number of exceptions. For instance, donations between spouses are exempt from tax, as are donations to government, registered political parties, and any approved public benefit organisation. Further, individual taxpayers are permitted to make donations of up to R100,000 per year on a tax-free basis.

Good to know: Using donations tax exemptions to reduce your estate duty liabilities should involve careful planning and a full appreciation for what it means to give away assets while still alive.