calculation of estate duty and usufruct
In planning an individual’s estate, it may happen that instead of the residue of the estate being bequeathed to the surviving spouse, she receives an immediate life usufruct over the residue, with the residue being left to, for example, the children or grandchildren. The value of the usufruct will qualify for the section 4(q) deduction, but will have to be calculated.
This is a difficult calculation because the residue of the estate over which the usufruct is to be enjoyed cannot be determined before it is known what amount of estate duty is payable.
Similarly, the amount of estate duty payable cannot be calculated before the value of the usufruct on the residue is calculated.
The following method can be used in the regard:
|Step1||Determine the residue of the estate as if no estate duty was payable|
|Step2||Calculate the value of the usufruct that accrues to the surviving spouse (in terms of step 1′s residue amount)|
|Step3||Calculate the estate duty using the value of the usufruct calculated in step 2 as the section 4 (q) deduction.|
|Step4||The value of the usufruct did not take into account estate duty payable and will have to be adjusted accordingly. The amount of estate duty calculated in step 3 should be divided according to the factor as set out in the following formula:
Factor = 1 minus (0, 20 x 0, 12 x present value of R1 pa)
“Present value of R1 pa” -
Represents present value of R1 pa capitalised at 12% over the life expectancy of the person to who the usufruct accrues (the same factor used to calculate the value of the usufruct – see step 2 above).
0, 12 – Represents the percentage of 12% which is used to calculate the annual value of property subject to the usufruct.
0, 20 – Represents the current estate duty rate.
|Step5||Divide the amount of estate duty calculated in Step3 above by the factor determined in step 4 above. The result represents actual amount of estate duty payable.|
Death in quick succession
If any part of the duty is charged in respect of the value of any property on which duty had previously been payable, on the death of another person at any time within ten years to the death of the deceased (second-dying), the amount of duty attributable to the value of that property is reduced according to the following scale:
The amount of estate duty on the estate of the second-dying will reduce by:
- 100% if the second-dying dies within two years of the first-dying person;
- 80% if the period is 2 – 4 years
- 60% if the period is 4 – 6 years
- 40% if the period is 6 – 8 years; and
- 20% if the period is 8 – 10 years.
This rebate will only be allowed if the property in question resulted in estate duty in the estate of the first-dying. Furthermore, the reduction in estate duty cannot be more than the duty paid on the death of the first dying.
Apportionment of estate duty
The executor has to pay the total estate duty of a deceased estate. He does, however, have the right to recover estate duty paid by him from certain persons entitled to benefit from property in the deceased estate.
Who is liable for estate duty?
In terms of sections 11 and 13 of the Estate Duty Act, the liability for estate duty rests on a number of different persons. The general rule is as follows: if the property against which the estate duty is assessed as “property” of the deceased as defined, then, with few exceptions, the liability for estate duty will fall upon the executor in his capacity as such.
The exceptions would include the case of any fiduciary, usufructuary or like interest (including an annuity charged upon property) or annuity enjoyed by the deceased. The person liable for the duty is the person to whom any advantage accrues as a result of the death of the deceased.
If, on the other hand, the property is “deemed property” of the deceased as defined, the liability will fall on the beneficiary or beneficiaries. Note that if the estate is the beneficiary, the executor, as executor of the estate will be liable for the estate duty.
The persons liable for the payment of the estate duty in respect of deemed property is the following:
Where an amount is recoverable under an insurance policy, the executor will be liable for the estate duty in respect thereof unless some other person is entitled to recover the amount under the policy. If an amount due under a policy is recoverable by a person other than the executor, such person will be liable for the duty attributable to the inclusion of the policy proceeds in the deceased estate.
Where the proceeds are recoverable partly by the executor and partly by some other person/s, then the liability will fall on them proportionately.
Where an amount is payable from any pension, retirement annuity or provident fund, the liability for duty falls on the executor if the payments are to the estate of the deceased. If not, the liability falls upon the person to whom the benefit accrues.
Where property is donated under a “donatio mortis causa”, the donee will be liable for the duty attributable to the inclusion of such property in the deceased estate.
Where property exists which the deceased was, prior to his death, competent to dispose of, the executor is liable for the payment of estate duty.
Method of apportionment of estate duty.
The procedure for calculating the estate duty attributable to certain property in a deceased estate is as follows:
y = (a / b) x c, where
y = the duty to be calculated in respect of that property;
a = the value of that property to the extent that it forms part of the net value (not deductible amount) of the estate;
b = the net value of the estate
c = the total duty payable on the dutiable estate before deducting any transfer duty previously paid.
When the estate duty has been apportioned in accordance with the above formula, the amount recoverable by the executor from the person liable for such duty is reduced by any transfer duty paid by the person so liable.
TO YOUR SUCCESS! - Jean.
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