We think it was Benjamin Franklin who said, “In this world nothing can be said to be certain, except death and taxes.” The problem arises when both hit you at the same time. Think about the thrills of living in a capitalist society… You get your first job and what’s the first thing you do? You buy a car, of course. Then you buy a home, furnish it, buy the next one, and so on and so on. A life dedicated to the acquisition of stuff. Along the way you pay a ton of taxes every time you buy the next shiny object. And then, one sad day, it all comes to an end when you pass away.
Now, it’s all well and fine leaving everything to your loved ones, but here’s where it gets absurd… you end up paying estate taxes on everything you’ve already paid tax on!
Talk about an incentive for starting a family trust. But let’s look at a second problem.
The problem with having a ton of debt!
Issue number one is paying two to three times more for something than someone who is paying cash. If that isn’t bad enough, issue number two is passing away and still owing the bank a fortune in debt.
Here is a classic example…
Have you ever seen those boards, attached to lamp poles, advertising an auction for a deceased estate? Why is that?
Well one of the functions of an Executor is to pay off your debts when you pass away. If there’s no cash available to settle the outstanding mortgage bond, the Executor has no other option other than to sell the home.
Since they don’t have time to sell it the usual way, in other words, to wait until they receive an offer, which the heirs are happy with, they sell it by auction to the highest bidder.
The cheapest solution to this problem of course, is life insurance. We’re not here to persuade you as to the merits of life insurance. Suffice to say, if you don’t have a million Rand lying around in your bank account, the next best thing is a million Rand in life insurance.
How to avoid the problem of estate taxes
When someone passes away, everything is hunky dory, as long as they leave all their assets to a surviving spouse.
The Estate Duty Act allows for what’s known as a section 4(q) deduction. This says that no estate duty is paid when assets are left to a spouse/partner.
So, when do taxes become a problem?
Leaving all your assets to a surviving spouse is simply delaying the inevitable.
At some point, your surviving spouse will pass away and the estate duty problem will raise its head once again. If this happens ten years later, the assets would have once again, increased in value, creating even more of an estate duty problem. You can’t win, can you?
The other scenario which often happens, is that the deceased leaves an asset to someone other than their spouse/partner. For instance, they might leave a holiday home to one of their children.
Basically, the Estate Duty Act deals with this as follows:
The first R3,5 million of your estate, if left to someone besides your spouse, is not estate dutiable. This is known as the section 4A abatement.
Should you not make use of this abatement don’t worry, your R3,5 million simply carries over to the death of the surviving spouse making their abatement R7 million.
Anything which exceeds this R3,5 million becomes known as the dutiable estate and is taxable at a rate of 20%.
Imagine for a moment dying with an estate worth R9 million?
- R5 million of that is left to the surviving spouse
- The remaining R4 million is left to your kids
- R3,5 million of the R4 million is estate duty free, leaving
- R500, 000 as your dutiable estate
- R500, 000 x 20% tax = R100, 000 estate duty
The surviving spouse inherits:
- R5 million
- less the R100, 000 estate duty
- leaving them with R4,9 million.
How unfair is that? The poor spouse gets saddled with the estate tax! Did we mention that life insurance is your cheapest solution?
Conclusion
Hopefully what we’ve shown is that there are two problems at death:
- Leaving debt behind for your loved ones to take care of, and
- Paying the taxes when leaving assets to anyone besides your spouse
Let’s look at debt again…
At death, there simply isn’t enough time to wait until you can get the best price for your assets. The Executor has one focus only, and that’s to wind up your estate. If there’s no cash to pay your creditors then the Executor will sell your stuff, plain and simple.
Your options are two:
- Either have enough cash lying around to pay off your debts, or
- Take out life insurance
Let’s look at Estate Duty again…
When drafting your Will, you need to understand the implications of your last wishes. Leaving assets left, right, and centre to loved ones could end up costing a fortune in estate taxes.
- If there’s enough cash lying around, then you’re home and dry.
- If there’s no cash lying around, then life insurance is the answer
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Until next time.
The Wise About Life team
