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by Alec Riddle CFP® B.A.

The Estate Duty Act has been amended to allow couples to make easier use of their combined estate duty exemptions on death but this could have implications for any estate plans you have made and you may need to revisit your will.

Estate duty tax is the tax charged in terms of the Estate Duty Act. The current tax rate for estate duty is 20 percent on the dutiable portion of your estate – after the exemption amount (currently R3.5 million) has been accounted for. Each spouse in a marriage is currently entitled to an estate duty abatement of R3.5 million and previously if you did not take advantage of this abatement, you lost it.

“The ‘portable spouse deduction’ has been introduced to simplify matters and in certain instances, it will also eliminate costs and complications arising from having to set up trusts and the like,” Riddle says. The amendment will now provide for the portability of the automatic deduction (R3.5 million). Thus, the R3.5 million deduction is now able to be rolled over and in effect, the surviving spouse will be able to use up to a R7 million deduction on death.

When the bill was initially drafted, the whole estate had to be bequeathed to the surviving spouse in order for him or her to benefit from the full R7 million abatement. However, this has since been changed and you no longer have to bequeath your entire estate to your spouse. The amendment applies to the estates of surviving spouses who die after January 1, 2010 – that estate can use the portion of the exemption that was not used by the first dying spouse as long as the tax return can be produced.

It is important to note that although this ‘portability’ concept does simplify things for many estates, the need for estate planning still exists and there are many things to consider, such as succession planning and the protection of assets. You should consider the following when deciding whether to use the exemption or to leave everything to your spouse and allow his or her estate to use the combined exemption:

1. Asset Protection:
First you need to consider whether you need to set up a trust. You may want to do so if you want to protect assets for the benefit of your minor children or to allow your assets to be used by future generations of your family. If you do want to set up a trust, then you will probably want to use your estate duty exemption in your estate in order to pass on R3.5 million of assets estate duty free to the trust.

2. Growth of the Asset/s:
The easiest option is to leave your assets to your spouse and pass on your exemption to your spouse’s estate. But, if you are leaving a growth asset, such as a property or an investment and particularly if the spouses are relatively young, it may be wise to
consider leaving the asset to a trust and using the abatement in the first dying spouse’s estate. This will help you to limit, or reduce the estate duty liability when the surviving spouse dies.

For example, if you transfer a growth asset, such as a R3.5 million property to a testamentary trust and it grows at 12 percent per annum – in 18 years time, the value of the property would be close to R30 Million. As the surviving spouse is not the owner of the property (the trust owns it), this amount is excluded from his or her dutiable estate. My recommendation is that you should consult a financial planner or specialist estate planner and be prepared to pay for independent, professional advice.

Example of Margaret and Bob Jones:
Under the “old” provisions and in terms of his will, Bob had directed that all of his assets (R7 Million) were bequeathed to his wife, Margaret, as he had been under the impression that
bequests between spouses were free of estate duty. In effect this was correct, but very often the estate duty problem was merely being deferred – so when Margaret died, her estate would have had a potential R700 000 estate duty bill ((R7 m – the R3.5 m exemption = R3.5m) x 20 percent = R700 000).

If Bob and Margaret’s goal was merely to save estate duty, Bob could keep his will because should he predecease Margaret her estate will enjoy an exemption of R7 m.

Alec Riddle
FPI Financial Planner of the Year 2009
Consolidated Financial Planning (PTY) LTD An authorised financial services provider FSP License Number 12978
Tel: +27 41 37 37 999
Fax: +27 41 37 37 177
http://www.consolidated.co.za
alec.riddle@consolidatedec.co.za
221 Cape Road, Mill Park, PORT ELIZABETH, 6001