Death, taxes and avoiding nasty offshore surprises

Every South African estate receives an estate duty abatement of R3.5m. In simple terms, the first R3.5m of your dutiable estate is effectively shielded from estate duty.

For married couples, the news gets even better.

If the first spouse to pass away does not fully utilise their abatement, the unused portion can generally be transferred to the surviving spouse. This can increase the available abatement in the surviving spouse's estate to up to R7m.

While it may not sound exciting, this is one of the simplest ways South African families can legitimately reduce their overall estate duty exposure.

One of the most powerful estate duty relief provisions in South Africa applies when assets are left to a surviving spouse. Generally, assets bequeathed to a spouse qualify for a deduction when calculating estate duty in the estate of the first-dying spouse.

The practical result? In many cases, little or no estate duty is payable when the first spouse dies. There is typically another benefit too. Capital gains tax on those inherited assets is often deferred until the surviving spouse disposes of them or later passes away.

Of course, this doesn't mean the tax disappears forever. Think of it as pressing the snooze button rather than turning off the alarm. The tax consequences are often deferred, not eliminated, providing valuable liquidity and financial breathing room for the surviving spouse.

When people hear about estate duty planning, they often think about complicated structures and sophisticated tax strategies. But sometimes the simplest tools are the most effective.

South Africans may donate up to R150,000 per year without triggering donations tax.

On its own, R150,000 may not seem life-changing. But over 10, 20 or 30 years, these annual gifts can remove significant value from an estate.

The benefit becomes even more powerful when those assets grow in value after being gifted. Imagine planting a tree in someone else's garden. Not only have you moved the tree out of your estate, but all future growth will occur outside your estate as well.

Of course, every family's circumstances are different, and donations can have other tax implications. Professional advice should always be obtained before implementing a gifting strategy.

Many people view retirement funds purely as vehicles for retirement savings. But they are much more than that. Generally, benefits held in approved retirement funds do not form part of your dutiable estate for estate duty purposes.

For many investors, maintaining an appropriate portion of wealth within retirement structures can be a highly effective long-term planning strategy.

One of the biggest misconceptions about estate duty planning is that the problem is today's estate value. The bigger challenge is often future growth.

An estate worth R20m today could be worth substantially more in 20 years.

This is where trusts can play an important role. When assets are held in a properly structured trust, future growth may occur outside the founder's personal estate. Over time, this can significantly reduce the value exposed to estate duty.

However, trusts are not magic boxes that make taxes disappear. South African trust legislation contains numerous anti-avoidance provisions and trust planning requires careful structuring and ongoing administration. A trust should therefore be viewed as a valuable tool, rather than a universal solution.

Many investors assume that if an investment product offers tax advantages during their lifetime, it must also be beneficial from an estate duty perspective.

Unfortunately, that is not always true. While investment wrappers may provide income tax, capital gains tax or administrative efficiencies, they generally do not remove the underlying value from your estate. On death, the value of the investment wrapper is typically included in your estate for estate duty purposes.

The lesson? Don't assume a good income tax strategy automatically translates into a good estate duty strategy. They are different taxes and require different planning considerations.

Although information has been obtained from sources believed to be reliable,  Investec Wealth & Investment International (Pty) Ltd or its affiliates and/or subsidiaries (collectively “W&I”) does not warrant its completeness or accuracy. Opinions and estimates represent W&I’s view at the time of going to print and are subject to change without notice. Investments in general and, derivatives, in particular, involve numerous risks, including, among others, market risk, counterparty default risk and liquidity risk. The information contained herein is for information purposes only and readers should not rely on such information as advice in relation to a specific issue without taking financial, banking, investment or other professional advice.  W&I and/or its employees may hold a position in any securities or financial instruments mentioned herein. The information contained in this document does not constitute an offer or solicitation of investment, financial or banking services by W&I . W&I accepts no liability for any loss or damage of whatsoever nature including, but not limited to, loss of profits, goodwill or any type of financial or other pecuniary or direct or special indirect or consequential loss howsoever arising whether in negligence or for breach of contract or other duty as a result of use of the or reliance on the information contained in this document, whether authorised or not.  W&I does not make representation that the information provided is appropriate for use in all jurisdictions or by all investors or other potential clients who are therefore responsible for compliance with their applicable local laws and regulations. This document may not be reproduced in whole or in part or copies circulated without the prior written consent of W&I.

Investec Wealth & Investment International (Pty) Ltd, registration number 1972/008905/07. A member of the JSE Equity, Equity Derivatives, Currency Derivatives, Bond Derivatives and Interest Rate Derivatives Markets. An authorised financial services provider, license number 15886. A registered credit provider, registration number NCRCP262.