Deceased estates, how they are taxed if there's no trust

Estate Duty

Estate Duty is charged at the rate of 20% (same as Donations Tax) on the net assets of the deceased estate (including deemed assets).

Each person is exempt from Estate Duty on the first R3,5m of their estate.

Any unutilised portion of this R3,5m carries over to the deceased's surviving spouse and is added to that spouse's R3,5m exemption.

Bequests between spouses are free of Estate Duty as are bequests to Public Benefit Organisations.

If two spouses die simultaneously or as a consequence of the same event, then the spouse with the smaller estate is deemed to have died first.

Donations made prior to death but which only come into effect upon death (known as donatio mortis causa) are free of Donations Tax, but attract Estate Duty upon death.

CGT

The deceased is deemed to have sold their assets to the deceased estate at market value at the moment of death and this sale attracts CGT at up to 20.25% depending upon the deceased's marginal tax rate.

If a person dies owning a company (or CC) that owns a growth asset such as fixed property, the tax and cashflow consequences are terrible. See details here

The legatee acquiring the asset does so at market value which becomes their base cost.

Such assets bequeathed to the surviving spouse do not attract CGT and the surviving spouse steps into the shoes of the deceased (i.e. takes over the asset at a base cost equal to that of the deceased). So the CGT only bites when the spouse dies.

Trap If a Will forgives a debt, then the legatee becomes liable to pay CGT on the amount of the debt forgiven.

The combined effect of Estate Duty and CGT can therefore be as much as 40,25%!

Transfer Duty

Transfer Duty is not payable upon transfer of fixed property to a beneficiary in the execution of a Will.

Minor Child Beneficiaries

Trap If a minor (under 18 years) is a beneficiary of a Will, then the bequest is turned into cash which is transferred to the Guardian's Fund which is administered by the Master of the High Court for the benefit of the child.

Tip To avoid this, create a trust under the Will (a Testamentary Trust) for the benefit of the child and bequeath to the trust.

Trap Be aware of the problem of the immediate cash needs of your surviving spouse. They have to carry on paying the bills immediately after death!

Trap Be aware that death is an event that can give rise to significant tax payments without a corresponding cash producing transaction. This can result in serious cash shortfalls necessitating the sale of estate assets to pay taxes. Sometimes the sale of the assets results in further taxes (such as CGT).

Tip Most of these problems can be solved via a trust

Should you wish to make an appointment, please feel free to visit Derek's diary book a time that suits you.

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