Retirement Funds are well understood for the income tax benefit in that contributions to retirement funds are tax deductible based on 27.5% of a person’s taxable income, capped on R 350 000 per annum. Often overlooked is the estate planning benefit of retirement funds, which are excluded from the estate for estate duty.
The estate duty exclusion is limited to deductible contributions, any excess contributions made, which did not qualify for a tax deduction are included for calculating estate duty. i.e. if you contribute R500 000 per annum to a retirement annuity the R150 000 above the R 350 000 deduction cap is dutiable in your estate, but that doesn’t mean you are not getting an estate planning benefit by contributing more than the deductible amount. Let me explain further.
All the growth on contributions within the retirement fund is excluded from estate duty; it is only the initial contribution amount, which is added back for estate duty, thus by contributing more than the deductible amount you have effectively capped the dutiable amount in your estate and excluded all future growth thereon from estate duty.
Importantly all non-deducted contributions can be withdrawn tax-free at retirement either as part of the lumpsum and / or offset against the pension income. Simply stated, anything you invest in the retirement fund for which you do not get an upfront tax deduction can be taken out tax free post retirement.
Without wanting to sound like a television salesperson “There is even more!” You are generating tax-free income and growth within the fund as retirement funds are exempted from taxation. What better vehicle to grow wealth, which can be passed seamlessly to the next generation on death without incurring any estate duty. The seamless passing refers to the nomination of a beneficiary, which adds yet another benefit of investing in retirement funds and that is bypassing the estate for executor fees via a beneficiary nomination.
I recommend High-Net-Worth individuals and those aspiring HNWI give serious consideration as part of their broader estate planning to contributing more than the maximum deductible limit to retirement funds, which provides for the same estate duty saving as other expensive estate planning structures like trusts.
Mcomm, CFP®, HdipTax
T. 021-205 1133