Answers to questions that usually elicit the most disbelief and tax shock from investors going through an estate planning exercise.

There are a few misunderstandings around deceased estate taxation and costs payable. I have compiled answers to questions that usually elicit the most disbelief and tax shock from investors going through an estate planning exercise, as well as from heirs and surviving spouses receiving assets from an estate:

1. Some life insurance policy payouts could attract estate duty.

Most SA citizens labour under the misapprehension that life insurance payouts will not form part of their estate and they will not pay any estate duty on the proceeds of the policy. It all depends on who the beneficiary is of said policy. If a policy pays out to a surviving spouse, then in terms of Section 4(q) of the Estate Duty Act, the proceeds of the policy will be exempt from estate duty. If the policy is paid out to a trust (testamentary or inter vivos), a child, a parent or to the estate, then the proceeds are noted as deemed assets that are then included in the estate duty calculation and could attract estate duty. If you fail to name a beneficiary, the proceeds can only be paid out to the estate. This will have the added effect of them forming part of the assets on which the executor’s fees are calculated. Not to say that having a policy pay out to the estate is always a negative thing, it will depend on the liquidity or solvency of the overall estate and whether a policy is needed to pay to the estate to cover administrative costs, fees and taxes.

2. An endowment could also attract estate duty

Once again, the beneficiary of the endowment will determine how it is dealt with in the estate. Section 4(q) again applies and will provide an exemption from paying estate duty for surviving spouses receiving the endowment policy or proceeds. If the beneficiary is a trust, or a child or the estate, the full value that pays out must be brought into the estate duty calculation.

3. Capital gains tax is calculated on death and could be payable by the estate

Another common misconception that needs to be clarified, death is indeed seen as a capital gains tax event, it is as if the deceased alienated all their property in one day. Certain exclusions do apply. Assets bequeathed to a surviving spouse will benefit from the “spousal rollover” of the capital gain. It means that the CGT will become payable on the surviving spouse’s passing and dealt with in their respective estate. The base cost of the asset is adjusted to the value as and when received by the surviving spouse. A primary residence exclusion will also apply on death. A total of R300 000 is available as an exclusion for each estate, for the tax year in which the deceased passed away. For other assets, not bequeathed to a spouse, the gain/loss is to be calculated using the base cost value and the value as of the date of death. If the asset is more liquid, such as a discretionary investment, and is liquidated in order to pay to the estate or to cover liabilities, a second CGT event must be made cognizance of. The date of death value is the base cost and the proceeds received once liquidated, market movements might lead to a second gain or a loss. Any CGT payable by the estate can be noted in the liquidation and distribution account as a liability, which will then offset the dutiable amount of the estate.

4. Transfer costs are payable by the estate when transferring property to an heir

Why this answer is surprising is that there tends to be confusion in terms of the difference between transfer costs and transfer duty. Transfer duty is a tax levied by Sars on property transfers, and transfer costs are payable to the conveyancing attorney attending to the transfer which is lodged and registered in the Deeds Office. If a property is to be transferred to an heir, even a surviving spouse, transfer costs will be payable by the estate in order to register the property in the name of the heir. If a property is sold out of the estate, the transfer cost and possible transfer duty are payable by the purchaser.

5. Your estate might be liable for bond cancellation costs or the cost of repaying the outstanding bond over immovable property in your estate

This answer is slightly more layered. First, we need to review the common law presumption that assets must be inherited unencumbered. This means that if a property has a mortgage bond registered over it, that bond needs to be discharged and then cancelled before it can be transferred to an heir. If the property is sold out of the estate, the proceeds will be utilised towards the bond repayment and related costs. If the immovable property is to be transferred to an heir, the costs of settling the bond and cancelling the bond are to be borne by the estate, if it is solvent. For cash strapped estates, arrangements can be made between executors and heirs who want assets to remain intact. Heirs can agree to pay the related costs or outstanding bond in order to receive the immovable property as is.

When the bond is cancelled, bond cancellation attorneys must be appointed through the bank that issued the bond. Costs to cancel the bond range around the R5 000 mark.

Substitution of debtor is an option, in the event of a larger bond that cannot be settled by the estate or heirs. This scenario usually plays out when two spouses were co-bond holders, and on the passing of the one, they want to take over the bond repayment. The heir would then be subject to the same affordability criteria of the bank as if they were applying for the full bond all over again. The new bond will then be registered at the same time as the previous bond is cancelled and the property is transferred to the heir.

6. Situs tax

The Estate of a South African resident with assets physically situated in the US or the UK might be exposed to further taxation, known as situs taxes. In the US, estate taxes are 40% on any amounts above the threshold of $60 000. Meanwhile, in the UK, the current inheritance tax threshold of £325 000, per person, transferable between spouses – amounts above the nil rate band is taxed at 40%. UK authorities will have primary taxation rights over immovable property, the SA tax authorities then tax the same asset, but the amount can be offset under double taxation relief. The SA executor must claim back the tax credit from Sars, limited to the taxable level in SA (20% for assets up to R30 million, and 25% for assets over R30 million).

The best advice to avoid any surprises or tax shocks is to speak to a professional, get proper advice while you are still around to mitigate the effects of some of the unknown.