How to use donations effectively in an estate plan

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Marietta du Preez | General Manager | Ecsponent Financial Services | mail me |


The saying goes that we should pay Caesar what he is due and not what he demands. To achieve this in tax planning, estate planners use donations as one of the ways in which to effectively and legally help individuals reduce the taxable values of their estates. Donations of up to R100,000 per year can be used to reduce estate duty.

However, not all donations are exempt from donations tax. It is important to enlist the help of an estate planning or tax professional to properly plan, manage and control the implementation of a strategy to minimise tax through donations.

Exemptions

Principal exemptions for donations tax include donations between spouses, donations to charitable, ecclesiastical and educational institutions, and certain public bodies limited to certain thresholds.

Donations of up to R100,000 will also not be taxed, nor will donations of assets already outside of South Africa, subject to certain conditions. Donations where the recipient will not benefit until the death of the donor are also not taxable.

Donations deemed taxable – which can include the disposal of property are taxed at a flat rate of 20% on the value of the donation, payable within three months after the donation. By donating assets and incurring donations tax at the time, the tax paid can reduce a person’s estate value, which may result in an estate duty saving.

Information relating to donations can be complicated and the help of a professional is valuable in finding the best ways to distribute wealth before and after death. Attempting to use interest-free loans as gifts will be flagged by SARS since they are not regarded as a gift for the purposes of donations tax.

Structure

Structured properly, an individual could anticipate bequests by donating assets to their heirs during their lifetime up to the maximum value allowed, thereby effectively decreasing the value of their estate and reducing the impact of estate duty. There are many factors which need to be taken into account, such as antenuptial contract terms.

Record

It is advisable to record all donations in agreements, though it is not a legal requirement that the donation be in writing, unless it is in regard to immovable property or donations promised for a date in the future. Both the donor and recipient should record the donation in their tax returns in the year in which the donation was made.

Anyone planning to use donations should also be aware that the donor is responsible for payment of the tax, and if he or she fails to make payment in the required timeframe, both the donor and recipient are jointly and severally liable. Tax legislation has closed many loopholes in tackling tax avoidance schemes – specifically where a taxpayer donates assets to another person with the intention to avoid paying tax on the profits generated by these assets.

There are many scenarios in which a donor may unwittingly be taxed on profits in their own hands rather than the recipient, demonstrating that professional advice is the best way to avoid nasty tax surprises.


 



2 COMMENTS

  1. Thank you for pointing out how donations and tax work Marietta! I’ll contact a financial advisor for advice on my personal donations/tax situation

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