Passing down wealth to future generations is more than a financial strategy – it is about creating a lasting legacy. In South Africa, where unique tax laws and estate planning regulations apply, careful planning ensures that wealth is transferred efficiently while avoiding unnecessary taxes, legal challenges, and financial burdens on heirs.
Many South Africans build wealth through businesses, property, investments, and retirement savings. However, without proper estate planning, a significant portion of this wealth could be lost to estate duty, capital gains tax (CGT), and administrative costs. Effective planning helps to preserve family assets, ensuring that loved ones can benefit without the stress of legal or financial complications.
Key strategies for effective wealth transfer planning include considering estate duty and taxes, using trusts to transfer wealth, leveraging section 10C for tax-efficient retirement income, drafting a comprehensive will, using life insurance to ensure estate liquidity, and preparing the next generation to manage inherited assets.
Estate duty and tax considerations
Estate duty in South Africa is levied at 20% on estates valued up to R30 million and 25% on the excess above R30m. To minimise these costs, consider the following strategies:
- Gifting assets during your lifetime. You can donate up to R100 000 annually, tax-free, gradually reducing your taxable estate.
- Using trusts strategically. Trusts offer estate duty protection and a structured way to pass on wealth. They are subject to strict tax regulations, including a 45% income tax rate and 36% CGT.
- Leveraging spousal exemptions. Assets left to a surviving spouse are exempt from estate duty, postponing tax liabilities until the second spouse’s passing.
- Using tax-efficient structures. Section 10C of the Income Tax Act provides tax relief on certain post-retirement income and estate duty, helping to optimise retirement withdrawals and wealth transfer.
Trusts as a wealth transfer tool
Despite strict SARS regulations, trusts remain a popular estate planning tool. When structured correctly, they offer:
- Protection against creditors and divorce claims.
- Efficient wealth distribution without lengthy estate administration.
- Potential estate duty and CGT savings.
- Continuity for family businesses and investments.
However, due to the high tax rates applied to trusts, expert guidance is essential to maximise their benefits while remaining compliant with tax laws.
Leveraging section 10C for tax-efficient retirement income
For retirees who contributed to a retirement fund but did not receive tax deductions on certain contributions, section 10C of the Income Tax Act offers an opportunity to benefit from these contributions:
- This provision allows retirees to reduce their taxable income after retirement, up to the amount of non-deductible contributions made during their working years.
- It can be offset against retirement income from annuities or against lump sums from pension, provident, and retirement annuity funds.
- Depending on what the beneficiaries choose to do with the death benefits from a fund, any remaining unclaimed excess contributions could be excluded from estate duty.
Additional contributions can be a powerful planning tool to reduce tax liability, optimise post-retirement income and at the same time potentially lower your estate duty liability.
Drafting a comprehensive will
A well-drafted will ensures that your estate is distributed according to your wishes, preventing intestate succession laws from determining the outcome that may not align with your family’s needs. Key elements of an effective will include:
- Clear instructions on asset distribution.
- The appointment of guardians for minor children.
- Naming a capable executor to administer the estate efficiently.
Regularly reviewing and updating your will as life circumstances change such as marriage, divorce, or the birth of children is crucial to keeping it relevant.
Using life insurance for estate liquidity
Life insurance plays a vital role in estate planning, particularly for estates with illiquid assets such as fixed property or business interests. Proceeds can be used to:
- Cover estate duty and executor fees.
- Settle outstanding debts.
- Provide immediate liquidity to beneficiaries, reducing the need for asset sales.
Ensuring adequate life cover helps families to avoid the forced sale of valuable assets to meet financial obligations.
Preparing the next generation
Wealth transfer is not just about passing down assets – it is about preparing heirs for financial responsibility. This can be achieved through:
- Financial education and mentorship.
- Involving family members in business and investment decisions.
- Open discussions about wealth management to instil responsible financial habits.
Heirs who are well prepared are more likely to preserve and grow family wealth, rather than risk its mismanagement. Involving them in the planning process beforehand improves their understanding and commitment to the plan.
Intergenerational wealth planning in South Africa requires a strategic approach to minimise tax exposure, protect assets and ensures a seamless transition of wealth. By leveraging trusts, tax-efficient retirement income strategies and proactive financial education, families can safeguard their legacies for generations to come.
Consulting with a financial planner or estate specialist is essential to tailor these strategies to your unique circumstances, ensuring that your wealth transfer plan is both effective and compliant with South African law.
Ettienne Bezuidenhout is a wealth manager at Alexforbes.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article is a general guide and should not be used as a substitute for professional financial or legal advice.
