By Liezel Hodgson
10 March 2025
Estate planning is like harvesting prickly pears.
The harvest requires careful planning and using the correct tools, or it can end in a painful thorny mess. The harvest is never easy, but the fruit is delicious.
The reward of a well planned and executed final will and testament far outweighs the problems caused for your loved ones without it. No one likes the discussion of what happens to your assets after your death. But when using gloves and tongs (proper planning) your loved ones can end up enjoying the fruits of your labour, instead of the thorns.
When doing your estate planning, it is important to evaluate different options, based on the present value of the cashflows of costs associated with different scenarios. This is preferred rather than only looking at the total cash outflow, as different options usually lead to cashflows happening at different times over an extended period. The total cash outflow should not be the only consideration. Considering the time value of money and discounting all cashflows back to the present might paint a completely different picture.
Why is time value of money important? If you need to make provision for payments in future, you don’t have to save the exact amount of money needed in future as money on investment earns interest. Therefore, it grows. The fact that R100 today is worth more than a R100 will be worth 10 years from now, is referred to as the time value of money. Buy why? Because today you can invest R100 and 10 years from now that R100 will have earned interest. Whereas the R100 10 years from now will just be that R100.
Let’s illustrate:
Mr X, aged 45, owns 50% shares in Company Y. Company Y is worth R5 million. Mr X is doing estate planning, and the following options is considered by him:
1. Slowly sell his share in Company Y over 10 years to a Trust.
2. Keeping the shares
Assumptions:
-Mr X is in good health and expected to live another 20 years
-Current prime interest rate is 11%
-Mr X has an estate that currently exceeds R3.5 million
-Mr X pays income tax at 45%
-Shares are sold at 5% above current value
-Base cost of shares = R500
Option 1: Slowly sell his share in Company Y over 10 years to a Trust
Impact on his income tax:
Capital gains tax on the sale of the shares
- R5mil x 50% = R2.5mil
- Selling 10% per year at 5% above current value = R262 500
- Less annual exclusion of R40 000 = R222 500
- At inclusion rate of 40% = R89 000
- At income tax rate of 45% = R40 050 additional tax per year for 10 years
- Total additional tax over 10 years = R400 500
Discounted back to current value at 11% interest rate = R235 863
Option 2: Keep the shares
Taxes applicable to the estate after 20 years
Capital Gains tax on shares
- R5mil x 50% = R2.5mil
- Less exclusion on death of R300 000 = R2 200 000
- At inclusion rate of 40% = R880 000
- At income tax rate of 45% = R396 000
Estate tax
- R5mil x 50% = R2.5mil
- Less Capital gains tax of R396 000 = R2 104 000
- At rate of 20% = R420 800
Total cash outflow: R396 000 + R420 800 = R816 800
Discounted back to current value at 11% interest rate = R101 310.90
No two scenarios or the assumptions relevant to planning will be the same, but what is clear, is that you need to evaluate the costs associated with a restructuring of your estate carefully and consider the timing of the associated costs.
Please contact our knowledgeable team for a consultation.
www.auroprofessional.com
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