Estate duty: Pay less by giving more

One of the most important reasons for a proper estate plan is to minimise estate duty and any possible capital gains tax liability.

South African law has no forced inheritance rules as in some countries. As a general rule, testators are allowed to arrange their affairs in a way that will minimise the amount of estate duty and capital gains tax liability. As with everything else in life though, ‘terms and conditions apply’. These are set out in Section 4(h) of the Estate Duty Act No 45 of 1955.

According to Section 4(h), the value of property bequeathed to any Public Benefit Organisation (PBO) which is exempt from tax (as defined in Section 10(1)(cN) and 10(1)cA)(i) of the Income Tax Act) or to the State or any municipality (as defined in Section 1 of the Income Tax Act) will be allowed as a deduction in determining the dutiable amount of a deceased estate.

By bequeathing the residue in one’s estate to a public benefit organisation, one can save on estate duty, e.g. James has calculated the value of his estate to be R5 million. He has the following options available:

• Option 1: Bequeath R3,5 m to his children and the residue (R1,5 m) to his sister.
• Option 2: Bequeath R3,5 m to his children, R1,2 m to his sister and the residue (R300 000) to a PBO.

The estate duty on these options will be as follows:

Option 1

Value of estate	5,000,000
Less primary abatement	(3,500,000)
Dutiable amount	1,500,000
Estate duty thereon @ 20%	300,000
Net cash in estate after estate duty	4,700,000
To be divided as follows:
– Children	3,500,000
– Sister	1,200,000

Option 2

Value of estate	5,000,000
Less residue to a PBO	(300,000)
Less primary abatement	(3,500,000)
Dutiable amount	1,200,000
Estate duty thereon @ 20%	240,000
Net cash in estate after estate duty	4,760,000
To be divided as follows:
– Children	3,500,000
– Sister	1,200,000
– PBO	60,000

It is clear from the above example that a net cash saving of R60 000 can be achieved by making minor changes to one’s estate plan.