Conditions to R7m estate duty exemption for couples June 13, 2009

By Laura du Preez

Each partner in a couple can make use of the R3.5 million estate duty exemption to ensure R7 million is passed on to their heirs free of duty. But usually they have to resort to complex structures such as trusts. The government plans to amend legislation to allow couples with simple estates to enjoy the full R7 million duty-free benefit without costly estate planning. But the issues are far from simple.

A proposal to allow the estate of a second-dying spouse to use any portion of the R3.5-million estate duty exemption not used by the first-dying spouse has proved to be impractical and is likely to apply only if the first-dying spouse leaves all his or her assets to the surviving spouse.

This became apparent this week when National Treasury officials, together with a South African Revenue Service (SARS) official, briefed members of Parliament's portfolio committee on finance on the Taxation Laws Amendment Bill. Among other things, the Bill seeks to amend the Estate Duty Act to extend the estate duty deduction.

Currently, you do not pay estate duty (levied at 20 percent) on the first R3.5 million of assets in your estate. The exemption applies to each spouse in a couple. In addition, any assets one spouse leaves to the other are duty-free.

It is possible for a couple to make the most of these provisions and leave R7 million to their heirs duty-free, but only if the first-dying spouse leaves R3.5 million to someone other than the surviving spouse.

If the couple don't want the surviving spouse to lose control of the first R3.5 million of their combined assets, they will typically leave the R3.5 million to a trust. The surviving spouse will be a beneficiary of that trust as long as he or she remains alive.

When the surviving spouse dies, the assets in the trust, as well as those in his or her estate, can be passed on to the couple's heirs, and the net effect will be that R7 million would have been exempted from estate duty.

Costly structures
In the Budget in February, the treasury and SARS announced that they planned to give spouses the flexibility to use their combined estate duty deductions without having to use often complex and costly structures, such as trusts.

The explanatory memorandum to the draft legislation says that many taxpayers cannot afford to use an estate planning expert to set up these structures.

But the proposed amendment will not allow the first-dying spouse to, for example, leave R1 million to his or her children, enjoying part of the estate duty deduction for this bequest, and pass on the balance of the deduction (that is, R2.5 million) to his or her spouse.

In terms of the proposal, should the first-dying spouse leave any assets to an heir other than his or her spouse, any unused portion of the estate duty deduction will fall away. In this case, the estate of the second-dying spouse will be entitled to an estate duty deduction of only R3.5 million.

If the amendment in the Bill is enacted, the first-dying spouse will have to leave all of his or her assets to his or her surviving partner for the estate of the second-dying spouse to enjoy a deduction of R7 million.

Keith Engel, the director of legislative oversight and policy co-ordination at the National Treasury, says although the treasury would like to make the portable deduction more flexible when the second-dying spouse dies, it is difficult to establish what deduction the first-dying spouse had enjoyed, because records of estates' accounts are not kept.

The memorandum says that at this stage the portability of the estate duty deduction is being limited to estates with assets solely transferred to spouses. This could be proved by way of the deceased spouse's will.

More than one spouse
The explanatory memorandum to the draft legislation states that where a deceased spouse has more than one spouse (that is, the deceased divorced and remarried or was in a polygamous marriage), the R3.5-million abatement will be divided among each surviving spouse in line with the value of the assets that are left to him or her.

For example, the memorandum states that if a deceased spouse has two surviving spouses and he splits his estate between them, leaving R2 million to one spouse and R4 million to the other, the first spouse will be entitled to increase her R3.5-million estate duty deduction by one-third of the deceased spouse's R3.5 million deduction and the second spouse will be able to increase her R3.5-million deduction by two-thirds of his R3.5-million deduction.

Engel says the maximum deduction will be R7 million, so a surviving spouse cannot increase the deduction he or she enjoys by remarrying and surviving a second partner.

The memorandum says the aim of the amendment is to allow couples with simple estates to enjoy the full R7-million estate duty deduction without complex and costly estate planning.

If the amendment is enacted, the transferability of the deduction from one spouse to another will apply to the estates of people who die from January 1, 2010.

Another amendment proposed in the Taxation Laws Amendment Bill will prevent people from using a usufruct that is in place for only a year to reduce the estate duty in their estates.

A usufruct is a right to the enjoyment of property and is included in your estate for estate duty purposes.

The value of the usufruct is calculated by capitalising the value of the property over the expected life span of the person to whom it is given or for the period for which the usufruct is in place.

Usufruct transferred
In an attempt to reduce estate duty, typically one spouse will bequeath a usufruct to the surviving spouse, stipulating that, on the death of the surviving spouse, the usufruct must be transferred to another person (typically, a child or a trust) for a year. The first-dying spouse transfers the underlying property - the value of which is reduced by the usufruct - to the intended heir, and estate duty is paid only on the reduced property value.

No duty is paid on the value of the usufruct that is bequeathed to the surviving spouse, as bequests to a spouse are free of estate duty.

When the surviving spouse dies, the usufruct is transferred, but its value in the surviving spouse's estate is low because it is based on the usufruct being enjoyed for only a year.

The amendment Bill aims to amend the Estate Duty Act to ensure that, as of January 1 next year, a usufruct is valued on the life expectancy of person to whom it is transferred and not on the duration of the usufruct.

Once the amendments are enacted, you may, with the help of a qualified adviser, need to revisit your estate plan or will.