How is estate duty calculated

In this advice column Geraldine MacPherson from Liberty answers a question from a reader who has questions around structuring his estate.

Q: I have some questions regarding estate planning . What I need to know is whether there is enough cash in my and wife’s estate to pay the estate duty and executors fees.

In order for me to make adequate provision for the costs associated with dealing with our affairs, I would like to get an estimate of the estate duty and executor’s fees.  

My questions are as follows. When determining the value of the estate on which the estate duty and executor’s fees are based:

 

  • Are assets such as property and motor vehicles valued at purchase price or at market value? If the latter, who determines the market value and on what basis?

The value of the assets is based on their market value, which the executor is tasked with determining. When it comes to assets such as immovable property, an appraiser appointed in terms of the Administration of Deceased Estates Act will have to be used and the estate will have to pay this person’s fees.

Practically, the car’s value will be the book value, unless it is sold, in which case it will be the actual sale price. Note that the Master can insist on an appraiser valuing any property (not only immovable property) if he has reason to believe that the value provided by the executor is not reasonable.

  • Are life insurance policies included in the assets as deemed property a) for the purposes of calculating executor’s fees; and b) for the purposes of calculating estate duty? 

If a beneficiary has been nominated then the policy benefits will pay directly to the beneficiary and will not fall into the estate. The executor will therefore not be eligible to charge his fee on the amount and it will only not attract estate duty if one of the spouses is the beneficiary or if it is a qualifying keyman or buy and sell policy.

If, however, no beneficiary is nominated or the estate is nominated as the beneficiary, then the benefits will fall into the estate, under the administration of the executor and he will charge his fee accordingly.

In such a case, the benefits will also be taken into account when calculating estate duty, unless the life insurance policy is exempt in terms of the provisions of the Estate Duty Act, or accrues to the surviving spouse. Interestingly, it is the person who receives the benefits who will have to actually pay the estate duty attributed to the policy benefits.

The types of policies that are exempt are certain employer owned policies, such as certain keyman policies, certain buy and sell policies, and policies that have been taken out to meet a requirement in an ante nuptial contract. In addition, any benefits, including death benefits from long term insurance policies that accrue to a surviving spouse, qualify as a deduction when it comes to estate duty under section 4(q) of the Act, thus no estate will be attributed to those policies. 

  • I have a retirement income fund (living annuity). Is this included in the assets of the estate for the purposes of a) calculating the executor’s fees; and b) for the purposes of calculating estate duty? If so, what value is given to this retirement funding given that it is pre-tax money?

If you have nominated a beneficiary for the annuity, then the benefit will pay directly to that beneficiary and it will not be included in the estate. The executor will therefore not be eligible for a fee on it. If no beneficiary is nominated, then the benefit will be paid to the deceased’s estate, as a lump sum.

This lump sum will attract retirement tax in the deceased’s hands, and the after tax benefit will be paid to the estate. The executor will then deal with this asset and will accordingly charge his fee.

In terms of current legislation, the benefits in an approved retirement fund or compulsory annuity are exempt from estate duty. This may change to some extent going forward, as National Treasury intends to include any “disallowed contributions” for estate duty purposes. We only have draft legislation on this at this point in time, so we do not know for certain how this will actually play out.