The Great Wealth Transfer – An Estate Planning perspective

We are living in an age where the largest transfer of Wealth is happening right before us. Ida Liu, the global head of Citi Private Bank recently spoke of the largest wealth transfer in history. “$100 trillion of wealth is going to next gen and millennial clients”.

In the US alone, by far the most Wealth sits in the Baby Boomers generation (those born between 1946 to 1964) with as much as 50% of the total assets among the 4 generations listed below.

Source: Visual Capitalist

The number of deaths of baby boomers is also staggering, with the average life expectancy in the US of 78.6, meaning it will likely be the generation with the most deaths over next 5-10 years.

Source: World in data

What this means is there is a significant transfer of wealth happening in the US alone. One could argue that an affluent individual with private health care and a stress-free environment could have a greater life expectancy than 79 in the US, and 76 (for males) in South Africa, which very much falls into the Baby Boomer generation.

For us this means we need to prepare and educate our clients around estate duty. Estate duty is a tax levied on the net value of a deceased estate in South Africa. It is important to understand how it works to ensure your loved ones are protected and your assets are distributed according to your wishes. Wealth can take a lifetime to build but lose all it’s momentum when the main accumulator passes on.

The need to plan therefore for the certainty of death, is becoming more and more of a priority particularly for the ‘boomer’ generation. We like to call this conversation inter-generational wealth planning, which we like to summarise like a relay race, example below.

• It starts with Runner number 1 – let’s call him Rob who creates the momentum (Wealth) in the form of a family business.

• Then Runner 2 – let’s call her Jane, Rob’s daughter, will at some point, hopefully, start running (begin managing her own wealth).

• Jane needs to have some momentum before she receives the baton, this can be managing her own investments or starting to be involved in the day-to-day activity of the family business.

• Jane also needs to look back to see where Rob is, what is coming, and perhaps more importantly is she prepared for what is coming. Other questions to ask at this point: does Rob have a family trust, is this business owned by the trust, who are the trustees and beneficiaries, does the business operate through a company and who are the shareholders of the business.

• Finally, there should only be 2 seconds or on average 7 steps for the baton to be passed to the next runner – this is where the momentum is continued or lost.

• If Jane is ready, has experience, knows what to expect, and understands the structure of the business, this bodes well for a successful transition.

• If Jane is not ready, has no experience, does not know what is coming her way, and has no idea how things are structured, this could lead to a long drawn out winding up of the estate, or even lead to the estate being disputed.

It all starts with a conversation, which we would encourage Rob to begin having with Jane, or the family. Better quality conversations provide better outcomes, and allow for open and transparent planning avoiding conflict down the line.

What can complicate things even further is when there are multiple runners in this race, how do deal with the family wealth fairly and to avoid disputes and family feuds. One easy question to ask is “what do you feel entitled to”, whether rightly or wrongly, family may feel entitled to some of the wealth so how does one deal with this in a fair manner.

At Kanga Wealth Management we believe that planning for the succession of your wealth is as important is accumulating it. This guide provides an overview of estate duty, its calculation, and some basic strategies to help you minimize its impact on the succession of your wealth.

How Estate Duty Works

In South Africa, inheritances are not taxed in the hands of the beneficiary of the estate. Instead, estate duty is paid by the deceased estate before any assets are distributed to beneficiaries. This duty is calculated on the net value of your estate.

The estate duty rate is currently 20% on the net value of a deceased estate up to R30 million. For net values exceeding R30 million, the rate is 25%.

What's Included in Your Estate?

Determining your estate duty liability starts with understanding what constitutes your estate. It includes:

• Property: This encompasses both tangible assets (like your home and vehicles) and intangible assets (like rights and servitudes) both in South Africa and worldwide if you're a South African resident.

• Deemed Property: This includes assets that don't exist at the time of death but come into effect because of it, such as:

  • Proceeds from domestic life insurance policies (except those payable to your spouse under a registered antenuptial contract, or correctly structured business assurance policies).

  • Accrual claims if you were married with the accrual system.

  • Donatio mortis causa – donations made contingent on your death.

• Exclusions: Importantly, certain assets are not included as deemed property, such as benefits payable from approved retirement funds (pension, provident, preservation, and retirement annuity funds).

What Can Be Deducted?

Several deductions can reduce the value of your estate before estate duty is calculated:

• Funeral and Deathbed Expenses: Reasonable costs for the funeral, tombstone, and medical expenses leading up to death.

• Debts: Outstanding debts owed in South Africa, including taxes.

• Administration Costs: Expenses related to administering the estate, such as executor fees, Master's fees, and transfer costs.

• Bequests to Public Benefit Organisations: Donations to approved public benefit organizations (Section 18A).

• Spousal Deduction (Section 4(q)): Assets bequeathed to your surviving spouse are exempt from estate duty, postponing the duty until the second spouse's death. This also applies to proceeds from domestic life insurance payable to your surviving spouse.

The Section 4A Abatement

After deductions, the R3.5 million abatement (Section 4A) is applied. Estate duty is only calculated on the net value exceeding this amount. If you're the first spouse to die, this abatement can be rolled over to your surviving spouse, effectively doubling the abatement to R7 million.

Important Considerations for Spouses

While bequests to a surviving spouse reduce your estate's value, they increase the surviving spouse's estate. Therefore, comprehensive estate planning is crucial for both spouses to optimize estate duty implications. "Spouse" includes legally recognized marriages, customary unions, religious unions, civil unions, and potentially same-sex or heterosexual unions deemed permanent by the Commissioner.

Minimizing Estate Duty

Effective estate planning aims to minimize estate duty. We can help you explore strategies such as:

• Retirement Products: Utilizing retirement funds can offer tax advantages.

• Inter Vivos Trusts: Trusts can be a valuable tool for asset management and estate planning.

• Offshore Pension / Trust: Offshore Pensions owned by trusts, or offshore trusts are an effective way of protecting assets domiciled outside of South Africa.

• Donations: Strategic gifting can reduce your estate's value.

How We Can Help

Navigating estate duty can be complex. Our team of experienced financial advisors can provide personalized guidance to:

·        Drafting of your Will or letter of wishes. Our advice would be to have it drafted by an attorney to avoid disputes when it is executed upon.

• Calculate your potential estate duty liability.

• Develop a comprehensive estate plan tailored to your specific circumstances.

• Implement strategies to minimize estate duty and maximize the value passed on to your beneficiaries.

• Leverage off industry experts to help put adequate structures in place to not only protect your assets but help wind up an estate in a quick and tax efficient manner.

Disclaimer: This communication is for informational purposes only and does not constitute financial, tax, or legal advice. Contact us today for a consultation. We're here to help you secure your financial future and protect your loved ones.