How Your Investments Are Impacted by Estate Duty
Stienemarié Bonsma-Potgieter, CFP® – Financial Planner
Planning for the future involves more than just growing your wealth—it’s also about ensuring that your assets are handled according to your wishes after you pass away. In South Africa, when a person dies, all their worldwide assets, including investments, form part of their estate and may be subject to estate duty. Understanding how different types of investments are treated for estate duty purposes is crucial in effective estate planning. A thorough estate planning analysis includes more than just estate duty estimates; it also looks at other taxes, a liquidity analysis, possible structure setup, and other considerations to ensure a smooth transition from one generation to the next. However, this article will focus solely on how different investments are treated regarding estate duty.
Cash Investments
Cash investments, such as savings accounts and fixed deposits, are included in your estate when calculating estate duty. This means their full value will be subject to estate duty after your passing.
Unit Trusts and ETFs
Unit trusts and exchange-traded funds (ETFs) are also part of your estate for estate duty purposes. Like cash investments, their value is added to your estate’s total worth and taxed accordingly.
Tax-Free Investments
Tax-free investments, although beneficial during your lifetime due to their tax-exempt status, are included in your estate for estate duty purposes. Even if you’ve nominated a beneficiary, the investment will still be part of your estate. However, nominating a beneficiary (if the asset is held on the platform’s life license) can help you avoid executor’s fees on this asset.
Local and Offshore Endowments
Endowments are included in your estate for estate duty calculations. The advantage here is that you can nominate a beneficiary, which will exclude the investment from executor’s fees, potentially reducing costs for your heirs.
Retirement Funds
Retirement funds, including pension funds, provident funds, preservation funds, retirement annuities, and employer umbrella funds, are governed by the Pension Funds Act. These funds do not form part of your estate for estate duty purposes, meaning they are not subject to estate duty tax. You can nominate beneficiaries, but the final distribution of these funds will also consider any financial dependents identified by the trustees.
Living annuities are excluded from your estate for estate duty purposes. You can nominate beneficiaries, who then have the option to receive the proceeds in cash (which is taxable) or transfer them into a Living Annuity in their name without incurring taxes or a combination of the two options.
Offshore Unit trusts and ETFs
Offshore investments are included in your estate for estate duty purposes. Depending on where these investments are held, you might need to draft an offshore will, as different countries have their own succession laws. Some jurisdictions may also lead to offshore investment inheritance tax and probate processes.
Understanding how your investments will be treated for estate duty purposes is an important aspect of estate planning. Each type of investment has different implications for estate duty, and knowing these differences can help you structure your estate in a way that minimizes tax burdens for your heirs. By planning and consulting with a financial planner, you can ensure that your wealth is transferred efficiently and according to your wishes.