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TWO TYPES

1. Estate Duty
2. Capital Gains Tax (CGT)

There are 2 types of taxes that is payable upon death. Firstly there is a capital gain tax payable due to the event of death, as the assets in your personal name are deemed to be sold to your deceased estate. Thus any asset of a capital nature that forms part of your estate may trigger this tax. The rate at which this tax is calculated and included is explained in the scenarios to follow.

Secondly, estate duty tax is payable upon the net asset value of your estate over R3.5 million at a rate of 20%.

Of course there is also executor's fees payable if an executor is nominated to wrap up and distribute the deceased estate. An executor is entitled to

  1. Executors fees of 3,5% + vat on the GROSS ESTATE VALUE
  2. 6% of ALL INCOME to the Estate

The scenarios to follow will prove why it is a very viable option to structure inter vivos trusts to hold property in order to minimize or even bypass what is commonly referred to as 'death taxes'

SCENARIO 1:
PROPERTY BOUGHT IN YOUR PERSONAL CAPACITY AND HELD IN SAME AT TIME OF DEATH

  • Property bought in 2010 for R1 million
  • Death in 2040 thus in 30 years
    • Growth calculated at 10% per annum compounded = value now stands at R 17.499 million
    • There was also reparations and additions done to this property over the period to the value of R 750 000
  • Now the question is, was this property deemed to be your primary residence or was it an investment for the purposes of CGT.

Primary residence
Fair market value at time of death (R17.499m) minus original base cost (R1m) minus improvements/additions (R750k) minus primary residence rebate (R2 m) minus exclusion at death (R120k)
R17.499m – R1 m – R0.75m – R2m – R0.12m = R13.629m
Thus the amount CGT's are payable upon is R13.629m
13.33% CTG's (calculated at maximum marginal rate of 40% @ individual inclusion rate of 33%) = R1.799.028m!

Investment property
Fair market value at time of death (R17.499m) minus original base cost (R1m) minus improvements/additions (R750k) minus exclusion at death (R120k)
R17.499m – R0.75m – R1m – R0.12m = R15.629m
Thus the amount CGT's are payable upon is R15.629m
13.33% CTG's (calculated at maximum marginal rate of 40% @ individual inclusion rate of 33%) = R2.063.028!

The property now falls in and forms part of your deceased estate. Thus estate duty is now also payable. Estate duty is calculated at 20% of the net worth of your estate over R3.5m. Thus let's hypothetically presume that this property is your only asset.

Fair market value (17.499m) minus CGT's paid (R1.413m) minus abatement (R3.5m)
R17.499m – R1.413m – R3.5m = R 12.586m
R13.621m x 20% = R2.517m
Thus estate duty payable over and above the CGT's is R 2.517m!

(These figures are done on the current tax structures and abatements. It is fair to assume that the abatement will be higher in 30 years time, but one must remember that the abatement is raised at a much slower curve than growth in property)

SCENARIO 2:
PROPERTY BOUGHT IN A TRUST AND HELD IN THE SAME AT THE TIME OF DEATH

HERE NO ESTATE DUTY NOR ANY CGT'S ARE PAYABLE AS THE TRUST DOES NOT DIE!!!! The trust stays in existence (if the deed is worded correctly) regardless of the fact that the founder or any of the trustees has died.

Just bear in mind that regardless which route is taken, 2% attorney's fees are also payable

Still if you weigh up what you will have to pay as 'death taxes' eventually, this is a much better option.

If you have bought the property in your name, don't despair! There is a third scenario we can also look at.

 

SCENARIO 3:
PROPERTY BOUGHT IN YOUR PERSONAL NAME AND AT A LATER STAGE TRANSFERRED TO A TRUST VIA THE USUSFRUCT PRINCIPLE WHERE IT IS HELD AT THE TIME OF DEATH

What is a usufruct?

The ownership of property can be divided into 2 constituent parts.

The right of use (usufruct)
Ownership (bare dominium)
We transfer the bare dominium or ownership of the property to the trusts while we keep the use of the property in our personal names

How is the value of the bare dominium calculated?

Example:
Current value of property = R1m
Age of usufructee = 40 years
Term of usufruct = 30 years

The formula to calculate the usufruct is:
fair market value (R1m) x 12% x factor [for 40 year old male with 29.54 years life expectancy](8.040)
R1m x 12% x 8.040 = R964800
Thus R 964800 is the value of the usufruct
The value of the bare dominium is thus R1m minus R964800 = R 35200
This value is transferred to the trust
Also remember that lawyer's fees are still payable on the transaction

The usufruct now becomes part of your estate, but 2 important things must be kept in mind

The usufructuary right is not attachable by creditors nor can it be transferred
It is an diminishing asset, thus for the next 30 years it will be decreasing by 1/30 of its value year on year while the capital growth accruing to the property will be accumulating in the trust.

Last modified on Tuesday, 02 July 2013 08:54

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