Our fiduciary experts look at the impact of the Davis Tax Committee proposals on wills.
The Estate Duty Act, 45 of 1955, provides that the dutiable amount of the estate of any person will be determined by deducting an amount of R3,5 million from the net value (ie assets less liabilities) of the estate. This amount is often referred to as the 'section 4A abatement' or 'primary abatement'. In this article it will be referred to as the 'primary abatement'.
The Davis Tax Committee has recommended that the primary abatement be increased to R6 million per taxpayer. While this proposal is to be welcomed, it does have significant consequences for wills drafting as well as for existing wills.
The fact that the primary abatement is to be deducted from the net value of the estate means that it can be bequeathed by the testator to a third party without estate duty consequences. The primary abatement is, therefore, often used as a bequest to a third party – usually a trust of which the spouse and children are contingent beneficiaries – and the residue of the estate is then bequeathed to the spouse. The effect of this is that the estate will not be dutiable, regardless of the value thereof.
When drafting a will for a client who requests such a third-party bequest, the drafter should, however, carefully determine whether such a bequest will be practical. The client must firstly have sufficient assets to settle the bequest and secondly, the composition of his/her estate should also be such that the assets allow settlement of this bequest.
Let's assume the client's net estate is valued at R7 million and comprises the family home valued at R4 million, a share portfolio of R2million and cash investments of R1 million. If his will provides for a bequest of 'an amount of R3,5 million', it should be evident that there isn't sufficient cash to settle the bequest. To counter this the standard wording for the will is to bequeath 'cash and/or assets to the value of R3,5 million'. This means that the bequest is not limited to cash and the executor can use a combination of cash and assets to make up the R3,5 million. This will avoid a situation in which the executor is forced to sell assets to generate cash to settle the bequest.
Even if this is the case though, it is obvious that the bequest is not practical – which assets will form part of this bequest? The share portfolio and investments total R3 million and the only other asset is the house. While the estate value is, therefore, sufficient to cover the bequest, the composition of the assets does not lend themselves to the bequest. In this scenario, the executor could be forced to sell the house to generate the additional cash needed to settle the bequest and this is clearly not in the interest of the heirs and/or family of the deceased.
To obviate changes to a will whenever legislation is amended it is standard practice, when referring to a particular section in an Act, to refer to the current position and any changes that may in future be made to that section. It is, therefore, normal for wills to include a bequest of R3,5 million or 'such amount that represents the section 4A abatement at the time of the testator's death'. While this means the will does not have to be updated every time the amount in the section 4A abatement is changed, it is still necessary that the will be revisited to ensure that the bequest remains practical.
Let's assume there is a client with an estate of R10 million, consisting of cash and investments. Using the current section 4A abatement, the trust will inherit R3,5million and the spouse the balance of R6,5 million. If the increased section 4A abatement is accepted, the trust will inherit R6 million and the spouse the balance of R4 million, which is probably not what the client intended.
While the proposed increase in the primary abatement is welcomed, it illustrates the importance of revisiting your will whenever changes are made to legislation to ensure that it remains valid, the bequests are still practical and that the will gives effect to your wishes.
Please contact your relationship manager to schedule an appointment with a fiduciary specialist, who will assist you with a review of your existing estate plan or create one from scratch.
DISCLAIMER The Fiduciary Focus Newsletter is intended for general information purposes only and should not be construed as tax, legal or accounting advice. This communication is based on our bona fide interpretation of legislation, rules, regulations and publications. Nedbank Private Wealth provides estate and tax planning advice; however, we do not provide tax, legal or accounting advice and you are requested to consult a professional tax advisor or professional in this regard.
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