Essential considerations when navigating tax and estate planning

Published: 3 May 2024

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Matt Rudman CFP®, financial adviser, Fulcrum Asset Management

In the heartland of agricultural pursuits, where the rhythm of the seasons dictates the flow of life, producers are not just stewards of the land; they are custodians of legacies. However, amidst the toil and triumphs of farm life, one critical aspect often overlooked is estate planning. As custodians of vast assets, producers must understand the importance of proactive estate planning, especially considering the financial implications at death. In this article, we delve into the complexities of estate planning for producers, shedding light on the costs involved, the significance of liquidity, and navigating tax complexities.

Understanding the costs at death
The passing of a producer brings not only grief, but also financial obligations that can burden the estate.

Estate duty, capital gains tax, executors’ fees, and liabilities are among the key expenses that must be addressed. Herewith a small breakdown of pitfalls that must be prepared for and addressed:

  • Estate duty: Upon death, a producer’s estate may be subject to estate duty.

    Estate duty is a tax levied on the estate of a deceased person before distribution to heirs.

    For estate duty purposes of a bona fide producer, the market value less 30% is used as the value of the farming property in the estate. Estate duty is currently 20% on value above R3,5 million and 25% on the value above R30 million.

    Producers also need to take note of the following: For estate duty purposes, farm land on which bona fide farming activities are exercised may qualify for a 30% discount on the fair market value. If a producer prior to his death let his farm to someone else, his estate will not qualify for the 30% discount. If the producer’s will determines that the farm be sold after his death, the discount will also not apply and the full yield of the sale will be liable for estate duty.

  • Capital gains tax: CGT in South Africa is a tax imposed on the profit made from the sale of certain assets, such as property, shares, and other investments. The tax is based on the difference between the selling price of the asset and its original purchase price, adjusted for certain allowable deductions.

    The CGT rate in South Africa for individuals is 18%, while for companies 21,6%, and trusts 36%.

    CGT in South Africa came into effect on 1 October 2001. It was introduced as part of the Taxation Laws Amendment Act, 2001, and is governed by the Eighth Schedule to the Income Tax Act, 1962.

  • Executors’ fees: Executors’ fees refer to the compensation paid to the individual or entity responsible for administering the estate, ensuring that assets are distributed according to the deceased’s wishes. The executor of your estate is entitled to remuneration of up to 3,5% plus VAT of your gross estate, and 6% plus VAT on income accrued and collected after your death. There is a tendency to appoint the last survivor as executor. In most cases it is a known fact that he/she may not be in a position to facilitate this function. The better option for the producer may be to appoint a qualified executor and to negotiate the fee with him/her.
  • Liabilities: This has never been more prevalent than in the case of producers that own farm land and who use production loans or other credit facilities for the purpose of producing crops and produce. Debts are generally paid out of the money or property left in the estate. If the estate can’t pay it and there is no one who shared responsibility for the debt, it may go unpaid. Generally, when a person dies, their money and property will go towards repaying their debt.
  • Succession planning: There seems to be the assumption that the generation that follows will simply continue with farming as well as maintenance of the outgoing generation. This may however not be as simple as it sounds and proper planning must be done, especially in case of an unforeseen and usually untimely death of the farm owner. Fair and equal distribution of assets to heirs provides major challenges to producers when estate planning is done and wills drafted.
  • Income tax implications: Tax and estate planning involve many interrelated and potentially complex issues for producers operating their farming activities in own name. The tax legislative provisions may have a significant influence on the way a producer manages his farming operations and his estate. Tax legislation poses significant challenges for producers, particularly concerning Section 9HA of the Income Tax Act. This provision, implemented in March 2016, has far-reaching implications for producers owning livestock and farming implements in their own name at the time of death. Previously, livestock held by a producer was subject to CGT upon deemed disposal to the estate. However, Section 9HA now mandates that livestock be deemed disposed of at market value, triggering income tax consequences.

Aligning estate planning with your will
Estate planning is not a standalone endeavour, but rather a holistic approach to safeguarding assets and preserving legacies. Aligning estate planning with one’s will is paramount to ensuring the feasibility and efficacy of the strategy. A meticulously crafted will serves as a blueprint for the distribution of assets, providing clarity and peace of mind to both the producer and the heirs.

By integrating estate planning with the provisions of the will, producers can navigate potential pitfalls and optimise tax efficiencies, thereby securing a prosperous future for generations to come.

The importance of liquidity
In the mist of all the complexities of estate planning, liquidity emerges as a crucial factor. The need for liquid assets to settle financial obligations at death cannot be overstated. Executors’ fees, estate duty, and CGT necessitate a readily available cash flow to ensure the seamless administration of the estate. Failure to account for liquidity constraints may result in distressing delays and complications, jeopardising the financial well-being of the estate and its beneficiaries.

The role of life insurance
In the unfortunate event of the producer’s death, life insurance can provide the funds necessary to cover estate duty, CGT, executors’ fees, transfer duty, and production loans. Moreover, life insurance can help facilitate fair and equal distribution of assets among heirs and ensuring a smooth transition of the farm to the next generation.

It often happens in practice that clients are required by financial institutions to provide security for debts by way of security cessions on life policies. The client’s knowledge of the implications of ceding policies to financial institutions often does not align with the above. The estate planner or financial adviser should play a role in deciding which policy should be ceded, or the financial institution may require a client to take out a new policy to serve as security for the debt. In such instances, the client as well as the planner should get the opportunity to discuss the practical implications of the security cession.

The tax implications related to pay-outs from life insurance policies can vary based on the type of policy you have. In some cases, estate duty considerations need to be factored into your estate planning.

Your domestic life policy is considered deemed property in a deceased estate and therefore become part of the deceased estate and can be subject to estate duty. However, under Section 4(q) of the Estate Duty Act, the proceeds directed to the surviving spouse are exempt from the gross estate of the deceased, avoiding estate duty and executors’ fees upon the death of the first spouse.

If the policy designates your estate as the beneficiary instead, the proceeds may be liable for estate duty. In situations where a third party owns and pays for the life insurance policy, some relief concerning the third party’s premium contributions is provided by Section (3)(3)(a) of the Estate Duty Act. Thus the proceeds of the policy will be considered deemed property in the deceased estate less the total premiums paid towards the policy compounded at 6% per year.

It is important to consider these estate duty implications when structuring your estate plan, taking into account the specifics of your policy.

Conclusion
In the ever-evolving landscape of agricultural enterprise, producers must equip themselves with the knowledge and foresight to navigate the complexities of tax and estate planning. By understanding the costs involved, embracing liquidity as a cornerstone principle, and aligning estate planning with their will, producers can safeguard their hard-earned assets and pave the way for a prosperous legacy.

As custodians of the land, producers hold the key to preserving tradition and prosperity for generations to come, making proactive estate planning an indispensable tool in their arsenal. It is essential to note that holistic financial planning may vary between individuals, thus making it imperative for producers to seek professional guidance tailored to their specific circumstances.