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Spouses need to review their finances

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Last month, the Davis Tax Committee issued an update on its tax recommendations, specifically around so-called death taxes.

Some of the key recommendations are to remove estate duty, donations tax and capital gains tax exemptions between spouses, yet substantially increase the value of an estate before estate duty is payable.

The implications for estate planning are significant.

Aside from whether or not these recommendations ever see the light of day, what is clear is that our legal and tax authorities would like to see a greater separation of finances between spouses.

Currently, when a spouse dies and leaves their estate to their surviving spouse, no taxes are paid, which seems to be a practical solution as many a household’s finances are built up together and both spouses share in the benefit.

As an example, one spouse may have been a major breadwinner over their career and built up assets in their name to provide an additional income in retirement for the benefit of the couple.

The major breadwinner may also have taken life cover to provide for the family in the event of their death.

Perhaps as a business owner and for credit protection purposes, the family home is in the name of the spouse, yet they both live and enjoy the home.

Generally, the assets of the spouses are for the enjoyment of the couple and it would be difficult to separate these assets from each other.

The problem is that not all relationships are formalised.

To benefit from the tax-free transfer of wealth, you have to be recognised as a spouse, generally through a form of legal union.

Families come in various forms, especially in South Africa, where polygamous relationships are allowed.

Think about a situation where two people have a child together, but the relationship has ended.

The parent may wish to leave their estate or life policy to the child to provide for their upbringing, but those assets are not exempt from tax as the child is not a spouse.

So it gets complicated and part of the Davis Tax Committee’s aim is to provide equality in how assets are transferred.

So the recommendation is to remove the tax exemption for spouses, which means that, irrespective of your relationship status, all beneficiaries will be viewed equally when it comes to estate duty.

At the same time, the Davis Tax Committee recommends raising the abatement from R3 million to R15 million.

That means estate duty of 20% will only be paid on an estate worth more than R15 million. If the estate is worth more than R30 million, the estate duty increases to 25%.

Considering that retirement funds are exempt from the estate calculation, an abatement of R15 million to cover other assets such as investments, residential and life cover should be sufficient for most South Africans.

Based on 2015 tax statistics, it would only affect about 135 estates.

However, Geraldine Macpherson, legal marketing specialist at Liberty, points out that for “asset-rich” individuals who may have built up a property portfolio or have their own business that they bequeath to their spouse, this could be a major estate planning issue and they would have to ensure that they had sufficient liquid assets (cash and liquid investments) or life policies to cover the tax payable.

The death tax situation is worsened by the recommendation to also remove the capital gains tax exemption between spouses, which could have a far greater effect than estate duty.

On a person’s death, all their assets are assumed to be “sold” or “transferred”, and capital gains is calculated and payable on gains in excess of R300 000. Currently, all assets bequeathed to a spouse are exempt from capital gains, which the Davis Tax Committee has recommended removing.

It also recommends that the tax exempt limit change from R300 000 to R1 million. Again, this poses a serious issue for “asset-rich” families, especially business owners.

A further issue that will make joint finances more complicated is the recommendation to remove the tax exemption on donations between spouses, which would mean that if a spouse wanted to transfer assets to their partner to accommodate the changes to estate duty, they would find that donations tax
could apply.

The only concession is that assets, and cash, donated between spouses as a matter of practicality should be allowed if it is for purposes of maintenance and day-to-day living.

Macpherson says this typically means that the spouse would have to use up the asset or money during the course of the year.

“Tax-free donations between spouses are often used in estate planning and in business succession planning, and the loss of this exemption would have an immediate effect, possibly greater than we anticipate,” says Macpherson.

David Knott of Private Client Holdings is not convinced that these changes will come into effect simply due to the complexity of trying to ascertain the value of the estate.

For example, if you are married in community of property, you already own 50% of the total estate irrespective of whose name the asset is in. In this case, the issue of donations tax is also complicated as the donation stays within the couple’s joint estate.

In the case of antenuptial with accrual, it becomes more complicated in accounting for the growth of the estate during the marriage.

“We find that trying to value the accrual in an estate is very much on a hit-and-miss basis. No one asks the surviving spouse to issue a balance sheet,” says Knott.

He says that while the implications could be far-reaching for estate planning, one doesn’t need to make any major changes until there is more certainty.

“Nothing has actually happened, but just be aware of potential tax changes,” says Knott, who says that a spouse who is not the main breadwinner needs to be very aware of what investments and assets are held in the partner’s name and, should these changes come into effect, must ensure that proper provision has been made to provide for death taxes.

“Spouses who are not working or are earning less income need to be adamant about having investments in their own name.”

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