How Is Your Estate Taxed When You Pass Away
When a person dies, their assets do not simply disappear or automatically pass on to their loved ones without financial consequence. In many cases, the estate of the deceased is subject to a form of tax known as estate duty. This is a tax on the value of a person’s assets at the time of their death and is regulated by the Estate Duty Act. While often misunderstood, it plays a significant role in how wealth is transferred between generations.
Understanding how estate duty works, what exemptions apply, and how specific financial products like life insurance policies and retirement funds are treated can help individuals plan more effectively and protect the value of what they leave behind.
How Estate Duty Is Calculated
Estate duty is charged on the dutiable value of a deceased person’s estate. The calculation begins by determining the gross value of the estate, which includes all property and deemed property owned by the deceased at the date of death. This includes immovable property like houses, movable property such as vehicles and furniture, shares, investments, cash, and certain financial policies.
Deemed property includes specific assets that are not physically owned by the deceased at death but are considered part of the estate for duty purposes. A classic example is the proceeds of a domestic life insurance policy on the life of the deceased, which is payable to a beneficiary or to the estate.
Once the gross value of the estate is established, deductions are made for liabilities, funeral expenses, administration costs, and certain other allowable deductions like bequests to public benefit organisations. After these deductions, what remains is known as the net value of the estate.
The first three million five hundred thousand rand of this net value qualifies for an abatement, essentially an exemption from estate duty. This means estate duty is only calculated on the amount exceeding this threshold. In the case of a person who was married and whose spouse passed away previously without using their own abatement, the surviving spouse’s estate may claim a combined abatement of seven million rand when the second spouse passes away.
Currently, the estate duty rate is twenty percent on the dutiable amount up to thirty million rand. Any value above that is taxed at a rate of twenty-five percent. These rates have been a point of discussion in fiscal policy circles, with ongoing debate about whether they adequately address wealth inequality or place an unfair burden on middle-class estates.
Exemptions And Special Treatments
Certain exemptions apply that can significantly reduce the amount of estate duty payable. Property bequeathed to a surviving spouse is fully exempt from estate duty, no matter the value. This provision ensures that families are not forced to sell off assets, such as the family home, simply to settle an estate duty liability.
Bequests to approved public benefit organisations are also exempt, encouraging philanthropic giving. Liabilities and administration costs incurred in the winding up of the estate can be deducted before calculating the dutiable amount.
Life Insurance Policies
Life insurance proceeds are treated differently depending on who owns the policy and who the beneficiaries are. If the deceased was the owner of the policy, and the proceeds are payable to their estate, it is included in the gross value of the estate. If payable to a nominated beneficiary, it is still deemed property and included in the estate for estate duty purposes, unless the policy was taken out by someone else for their own benefit.
However, policies where the proceeds are payable to a surviving spouse are generally exempt from estate duty, provided certain conditions are met. Many people use life insurance as a liquidity tool to cover estate duty and other costs, reducing the risk of having to sell off physical assets.
Retirement Funds
Retirement funds, such as pension, provident, preservation, and retirement annuity funds, receive special treatment. The lump-sum death benefits paid from these funds are not considered part of the deceased’s estate for estate duty purposes. Instead, they are dealt with in terms of the Pension Funds Act, which gives the fund’s trustees discretion in allocating benefits among dependants and nominees.
While these benefits fall outside the estate for estate duty, they may still be subject to tax in the hands of the beneficiaries, depending on the amounts and prevailing tax legislation at the time.
Estate duty remains a significant consideration in estate planning and understanding how it works can help individuals make better decisions about how to structure their affairs. By taking advantage of exemptions like the abatement, the spousal deduction, and by carefully planning the ownership and beneficiaries of life policies and retirement funds, it is possible to limit the financial burden on loved ones after death.
While there is active debate about whether current estate duty rates and thresholds fairly balance revenue generation with protecting middle-class wealth, the law as it stands offers several tools for effective estate planning. Professional advice is essential to navigate these rules and ensure that both legal requirements and family intentions are properly honoured.