Estate planners and administrators must take note of recent cost increases. Master’s fees, VAT, estate duty and donations tax rates have increased.
In the Minister of Finance’s recent 2018 budget speech, he announced the increase of VAT to 15% from 14% with effect from 1 April 2018. Most professional executors and trustees should be registered VAT vendors.
Executor’s fees are generally 3.5% plus VAT. At 15% this will equal 4.025% of gross assets. For an estate of R5 000 000.00 this represents an increase of R1 750.00. Effectively there will be an increase of R350.00 for every R1 000 000.00 of the gross estate.
An estate requires the provision of other services such as the conveyancing of fixed property, tax returns and financial statements by accountants, and sworn appraiser or valuation fees. Most of these will be affected by the VAT increase.
Fees due to the Master of the High Court by the deceased estate were increased on 1 January 2018. Previously these fees could never be more than R600.00. This level was reached around the R200 000 gross assets mark.
In terms of the new regulations Master’s fees are capped at R7 000.00 – once the gross estate reaches R3 600 000.00. A new sliding scale applies – last changed in 1983, the new rates are a substantial increase.
The administration of testamentary and inter vivos trusts is often carried out by professional trustees. The new VAT rate will apply to their annual administration fee and other services.
The estate duty rate of 20% was increased to 25% for persons dying on or after 1 March 2018 for the portion of the dutiable estate that exceeds R 30 000 000.00 only. So 20% will apply up to R30 million (R6 million) and 25% will apply for each rand above that.
Donations tax is 20%, but from 1 March 2018 a donation (or donations) in excess of R30 million in one tax year will attract tax at 25% on the value in excess of R30 million. It is, therefore, still in line with estate duty.
Of most concern was the mention in the budget review that the “official rate of interest” – currently equal to the ‘repo rate’ plus 1% (7.5% p.a. as of 28/3/2018) – should be increased to the ‘prime rate of interest’ charged by local banks, which is currently around 10% p.a.
The official interest rate is used, among other things, to calculate the deemed donation brought about by section 7C of the Income Tax Act, on non-interest bearing or low-interest loans between ‘connected persons’ and trusts. This is a common estate planning tool that has proved to be very effective.
The prime rate of interest takes into account the banks' risk margin and, therefore, it seems inappropriate to invoke such a rate rather than say a money market rate. Whether this idea sees the light of day remains to be seen.
It is important to note that the need for liquidity does not end upon the winding-up of an estate. The trustees of the resultant testamentary trust also need money to pay the trust bills and this is often overlooked by clients. Only having fixed assets in a trust is not good enough to sustain the trust until, for example, all the beneficiaries have attained the age of majority or become entitled to the trust capital.
The increase in estate duty and donations tax rates means that the use of trusts in estate planning becomes even more important in the view of experts in the field. With inflation running at about 5% p.a. assets can grow enormously in value over one’s lifetime.
All of this means that the liquidity of an estate and trust – which is already a major problem for executors and trustees – requires more scrutiny. More money will be needed. Cash in the bank and life insurance paid to the estate and/or testamentary trust must be planned for by financial planners.
Article written by David Thomson, Senior Legal Adviser, Sanlam Trust