The Financial Wellness Coach: Being smart about capital…

Question: First, let me say how much I am enjoying your column. it’s always informative. You recently wrote about how offshore clients can move shares to a beneficiary-designated endowment fund. I checked this with my financial advisor and she says that any sale would incur capital gains tax that would potentially negate any gain in execution fees. Is that right?

First published in the Daily Maverick 168 weekly newspaper.

Reply: When you die, there are three significant costs:

  • Capital Gains Tax (CGT);
  • Executor’s fees; and
  • Inheritance tax.

In a previous article, I showed you some strategies you can use to save executor fees.

Your advisor rightly says that converting your stocks into a capital life insurance policy can trigger a capital gains event. However, I don’t think this will nullify an executor’s savings profit. I will outline my reasoning below.

One of the taxes that you can’t get away from is CGT. Death will trigger a Capital Gains Event. If you do not sell the asset in your life, it will be considered sold when you die. CGT must then be paid for.

CGT has to be paid at some point. You can pay for it:

  • In full at death; or
  • In stages – now and on the growth from now to death.

In any event, the Capital Gains Event will occur. So if you move the shares into a foundation structure with a beneficiary, you will no longer pay CGT (in fact, a saving of R40,000 could be made, but I’ll come back to that). However, you save 4% on executor fees.

If you die, your estate will receive an exemption from the first R 300,000 in CGT. This amount is achieved surprisingly quickly, as can be seen below:

Remember that the first R2 million of profit from your primary residence are excluded from this number.

What many fail to realize is that you receive a R40,000 exclusion from CGT every year.

If you use this wisely, you can reduce the CGT that you pay to the SA Revenue Service in your life. This is one of the benefits that you gain or lose. It doesn’t roll from year to year. If you don’t use it one year, it won’t be added to the next year’s amount.

Depending on your tax rate, you can get quite a decent return on your wealth before paying CGT, as shown below:

Someone with a tax rate of 18% could make a profit of R 555,556 and not pay CGT, while someone with a tax rate of 45% would pay tax on profits over R 222,222. This means that every year you can sell assets, take the capital gain, and reinvest so your starting point is higher. This will help reduce your CGT liability when you die.

Insider tip

If your tax rate is over 30%, make your longer-term investments through endowment insurance. The effective CGT rate here is only 12%. You save on CGT and when you add a beneficiary you don’t have to pay executor fees.

When your financial advisor conducts your annual review with you, consider what assets could be sold to take advantage of this R 40,000 exclusion. You will need to enter the numbers, but in most cases moving your basic expenses annually can lower your tax burden.

There are many moving parts in financial planning, especially at the time of death. You need to have a holistic view of your affairs. You want to reduce leakage in the form of avoidable costs and unnecessary taxes.

Capital gains tax is the only tax that surprises many people in the event of death. It is also the most difficult to get around. By systematically selling part of your wealth every year, you can reduce the total amount of taxes you pay.

To answer your question, there are good reasons to pay CGT early, convert the holdings into a foundation policy, and save on executor fees. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available to Pick n Pay Smart Shoppers for free at these Pick n Pay Shops.

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Kenny Meiring

Kenny Meiring MBA CFP is an independent financial advisor. You can contact him at Financialwellnesscoach.co.za. Please send your questions to [email protected]

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