When people speak to us about wanting to set up a trust, saving on tax is one of the main reasons they mention. They’re typically high-earning executives who have spent a large part of their lives working hard to accumulate wealth for their family, and should they pass away, they don’t want SARS to take more than it’s due.
But while trusts get a lot of air time in social media comment threads and around braai fires, they’re not the only (or even the best) way to reduce your tax bill. And since a trust can set you back as much as R20 000 a year in admin fees, that’s good news!
WATCH: Who are trusts for and who should avoid them?
How to legally save on estate duty tax without opening a trust
The biggest tax you're probably going to pay when you pass away is estate duty. Your first R3.5 million is estate duty free. After that, all assets that are estate dutiable will be liable. This includes most things – property, share portfolios, money in the bank, endowments, etc. All of this will be taxed at 20% up to R30 million, and then 25% on anything above that.
But there are exceptions.
Pensions funds:
Retirement annuities, pension funds, provident funds and preservation funds will not be hit by estate duty. That estate planning benefit is massive.
Spousal inheritance:
Simply nominating your spouse as the beneficiary in your will can potentially save you millions. You could almost call it a “life hack” of estate planning, especially because “spouse” doesn’t necessarily mean you have to be married. In finance, there are different legal definitions of a spouse, which include various types of permanent life partnerships.
If your relationship qualifies as spousal and you nominate your life partner to receive assets, those assets will become a deduction in your estate, so they won’t be liable for estate duty.
When a spouse inherits an asset, there's also no capital gains tax (the tax that’s liable when you sell an asset and realise a profit), as it’s seen as a roll-over. This can be another huge saving.
READ MORE: How to pay less tax in South Africa without landing in jail
How to save executor’s fees without opening a trust
Aside from tax, the second estate planning cost people are often concerned about is the executor’s fee.
The executor is the person who oversees the winding up of your estate should you pass away. They make sure all the tax is paid, all the debt is settled, and that everyone receives what’s due to them. It's quite a tough, labour-intensive job, so they get paid for their service by charging a percentage on everything they oversee. The fee usually goes up to around 4% inclusive of VAT.
Assets within a trust don’t attract executor’s fees because when an asset is in a trust, it’s no longer yours – it belongs to the trust, so the executor doesn’t have to touch it. The downside is that, well, it’s no longer yours, so you can’t easily make decisions about what happens to it while you’re still alive.
But there are other arrangements that won’t attract executor’s fees which you can keep in your personal name.
Retirement funds and endowments:
Once again, retirement funds fall into this category, as do endowments (and their cousin, sinking funds), which are another type of investment vehicle. When someone passes away, their estate gets frozen while it’s being processed. Endowments don’t get included in that freezing, so your nominated beneficiary will receive the money quickly without the executor having to get involved.
Living annuities:
Once you retire, you can convert the money in your retirement fund into a living annuity that pays you a monthly income (a.k.a. a pension) like a salary, except that it’s coming from your own savings. You can also nominate a beneficiary for your living annuity, and they should inherit it cleanly, saving executor’s fees and the hassle of a trust.
Read more: I’m 55 and planning to retire from corporate in 10 years. Do I need a financial planner now?
How to save on donations tax without opening a trust
Donations tax is basically estate duty that’s payable while you’re still alive. If you give a large sum of money away to someone, for example your child or grandchild, there will be donations tax liable on that. Once again, however, there are legal ways to reduce your tax bill without opening a trust.
Stay under the limit:
You have R150 000 limit per year that you can donate to someone tax free.
Spousal donations:
Again, a spouse is a life hack. You can donate as much as you want to your spouse and there's no donations tax payable.
So if, for example, you wanted to give your grandchild some money, you could give R150 000 to your spouse (no donations tax incurred on money given between spouses), and then between the two of you, you could give you grandchild R300 000 that year without incurring donations tax.
Doing this annually can sometimes be a good strategy for people who want to give their children or grandchildren money while they’re alive. It also reduces the size of the estate so that when they pass away, there will be less to pay in tax and executor’s fees, which are both calculated as a percentage of the total estate.
We have clients who are receiving that kind of donation from their parents each year on behalf of their children. Every year they receive R300 000 from their parents and it goes into the children's investment portfolios. All the paperwork is done, and it's declared to SARS. After ten years, the two children will have R3 million invested.
Enjoy the simple life
In the past, trusts were often used as tax-saving vehicles. However, regulations have evolved. And while trusts still have their place in estate planning, for many high-earning South Africans whose priority is tax efficiency, we find the tools above are enough to accomplish what they wanted to get out of a trust. They’re more cost effective, and they allow you to enjoy a simple life without the complications that often accompany trusts.
Estate planning is personal. How you structure your estate plan is entirely dependent on your own individual circumstances and forms a major part of our proprietary financial planning process, The Freedom Way™. If you’re a high-earning South African 10-15 years away from making work optional and you need help getting your head around trusts, taxes and all the other complexities of estate planning, request an intro call.
This article is for educational purposes only and does not constitute financial advice.