Practical implications of unforeseen costs:
Where the deceased had fixed property/properties in his estate, the cost of bequeathing these can be very high. Unforeseen and unplanned costs of bequeathing can have the detrimental effect that the estate or the beneficiaries might be forced to sell assets to cover these costs. In extreme circumstance it might result in the sale of the very asset bequeathed, thus defying the purpose of the deceased’s last wish. This, however, can be avoided with proper and timeous planning.
Options available to clients and cost thereof:
Where a client has immovable properties, for example, the following three options will be available, with the respective cost implications:
| Option A Properties bequeathed to trust in will, at death of owner | Option B Properties are transferred to a trust, while owner is still alive | Option C Properties bequeathed to spouse at owner’s death | |
Estate Duty | 20% | None if no loan outstanding or 20% on outstanding loan account | None, section 4(q) Estate duty liability postponed until death of the spouse |
Executor’s Fees | 3,5% plus VAT | None | 3,5% plus VAT |
CGT | 10% approximately | 10% approximately | None (Rolled Over) Postponed until death of spouse |
Transfer Fees (on or after 23 February 2011) | None | R 0 – R 600 000: 0% R 600 000 – R1 000 000: 3% of the value above R 600 000 R1 000 001 to R1 500 000: R12 000 plus 5 % of the value above R1 000 000 R1 500 001 and above: R37 000 plus 8% of the value exceeding R1 500 000 | None |
Total Costs | 33,5% | 10% plus estate duty on loan account and transfer fees | 3.5% but estate duty and CGT postponed |
Option A appears to be expensive, so how can this problem be solved? In taking out a whole life policy all the liquidity requirements, including CGT, estate duty, executor’s fees and the liabilities of the estate can be taken care of.
No additional benefits should be added on this policy, only life cover, as the intention is only to cover costs and liabilities upon the death of the planner and at no other time. The beneficiary on this policy should be the estate to ensure that the executor has sufficient cash to settle all costs. As the policy can lead to additional executor’s fees and estate duty, provision should be made for this by increasing the sum insured accordingly (divide by 0.76808).
Although this option may appear to be expensive it may in fact be the cheapest option if the costs are financed through life cover.
Option B this option might appear to be a cheaper option but bear in mind that CGT needs to be paid on the transfer of the assets into the trust which may have a serious impact on the planner’s cash flow. In practice, often the cash is not readily available for the planner to exercise this option. The advantage of this option is that the planner limits or caps the growth of the asset in his personal estate.
Option C might seem like the least expensive route to take, but take note that it is only the least expensive at the time of the death of owner. At the death of the surviving spouse estate duty, CGT and executor’s fees are payable and that for purposes of CGT specifically, the base cost will be that which would have applied on the death of the first spouse. This option is preferred where the planner does not have the capital available for option A or B and/or where the planner is not insurable. Usually it can be recommended that life cover be taken out on the life of the spouse to cover all the above mentioned costs.
(Note: An individual’s primary residence would be exempt up to the value of R2 000 000.00. A gain of R1 500 000 will be exempt if the value is more than R2 000 000.00)
Conclusion
Make sure your clients are aware of the full consequences of costs of bequeathing fixed assets and choose the best option suited to their personal circumstances. Instead of being driven by the costs involved, make certain that the planning is based on the client’s objectives and that the costs are catered for, through life cover, where possible.
