Tax efficient estate planning is an important consideration despite the significant impact on South Africa’s ailing economy from the Covid-19 pandemic and the resultant lockdown. Kemp Munnik, head of Structured Solutions at Bravura, reckons that the current environment provides an excellent opportunity for tax-efficient estate planning for individuals so as to optimise their financial position as the market begins to recover.
The ramifications of the country’s economic lockdown imposed to limit the impact of the pandemic are reduced turnovers for businesses that have resulted in diminished and uncertain cash flows, with no clear indication of when a recovery can be expected. This has had a negative impact on market values, with significant declines evident in JSE listed shares (although values are currently on the up again). There are similar ramifications in the unlisted space and fixed property sectors (where office, commercial and retail rentals are under pressure as a result of the economic downturn).
Although South Africans may be considering “sitting tight” in the current environment of depressed market values as well as talks of an increase in inheritance tax and a so-called solidarity tax, this may present an ideal opportunity to implement tax efficient estate planning strategies or to review current corporate structures to ensure that one’s affairs are efficiently structured. This can enable business owners to effectively harness the growth that will hopefully emerge in the post-pandemic economic recovery.
Tax-efficient estate planning
The silver lining in the cloud of depressed market values is that it provides an excellent opportunity for tax efficient estate planning. The significance of the current opportunity can be illustrated by way of an example. Consider an individual who holds shares in the family business in his or her own name with a pre-pandemic value of R100 million. The long-term prospects of the business remain relatively unchanged (assuming a return to normality), but it is anticipated that the business will take three years to return to its pre-pandemic growth trajectory. As a result of Covid-19, there is a temporary reduction in the current fair market value of the business of, let’s say, 30%. Using this opportunity to implement an estate planning strategy, the individual would thus be able to transfer the shareholding to his or her heirs, either directly or to a trust, at the current depressed market values.
When the shares recover as anticipated back to the pre-pandemic value of R100 million and continue on the pre-pandemic growth trajectory, the individual would in the long run save estate duty of 20% on R30 million (in other words, a total of R6 million) and additional estate duty of 25% on any growth above R100 million. (The estate duty rate increases to 25% of the value of the estate above R30 million.)
Added benefits of a well-thought-out estate planning strategy are:
• Growth assets are removed from the individual’s estate and will not attract estate duty on his or her death.
• The transfer of wealth between generations could be initiated cost effectively.
• Savings in executor’s fees (on average 2,5% to 3,5% of the gross value of the estate).
• Heirs and/or beneficiaries are informed on the plans and expectations of the current owners and have a clear understanding of how and when to expect capital or income distributions.
• Donations tax savings if donated at reduced values.
While business owners are currently facing many pressing issues amidst the uncertainty, they must be aware that the estate planning opportunities triggered by lower market valuations may not last forever, and the time to implement effective low risk estate planning is now.
Should individuals have already considered implementing an estate planning strategy but have been hesitant or unsure about how to undertake this, they are strongly advised to reach out to experts within the structured solutions environment to receive sound guidance on how to optimise and safeguard their current and future wealth.