Estate duty is one of those taxes that many people know about in theory, but very few actively plan for. It only becomes real when a loved one passes away and the estate is wound up, often revealing how much value quietly leaks away to taxes, fees, and avoidable inefficiencies.

The reality, however, is that estate duty is not a penalty for being wealthy; it is a predictable tax with well-defined rules, and with proper planning, it can be significantly reduced.

Estate duty is levied at 20% on the first R30 million of a dutiable estate and 25% on anything above that. Every individual is entitled to a R3.5 million abatement under Section 4A of the Estate Duty Act 45 of 1955, which reduces the value of the estate subject to duty.

The perks of being married

For married couples, this system is far more flexible than it first appears. Assets left to a surviving spouse are completely exempt from estate duty under Section 4(q), and any unused portion of the deceased spouse’s abatement rolls over. When structured correctly, this allows a couple to effectively shield R7 million from estate duty, often without any complex planning at all. Simply ensuring that wills are aligned with this principle can make a meaningful difference.

Retirement funds: Life after death

One of the most powerful tools in estate duty planning is retirement funding. Pension funds, provident funds, and retirement annuities are excluded from your estate by law. This means that they do not attract estate duty, are not subject to executor’s fees, and are distributed directly to dependants and nominees by the fund trustees.

For many families, retirement funds also provide immediate liquidity after death, which can be crucial when the rest of the estate is tied up in property or businesses. Over time, prioritising long-term savings inside retirement vehicles rather than discretionary investments can materially reduce the eventual estate duty burden.

Generosity pays

Lifetime giving is another strategy that shifts value out of an estate before death. Donations tax is levied at the same rate as estate duty, but the advantage lies in the timing. Once an asset has been donated, any future growth no longer forms part of the donor’s estate.

South African residents are allowed to donate up to R100,000 per year free of donations tax, and this exemption can be used strategically to reduce estate value gradually. This approach is particularly effective for assets with high growth potential, such as equities or interests in a growing business, where the long-term compounding benefit of removing future growth can be substantial.

Trusts: Handle with care

Trusts are often seen as the cornerstone of estate planning, but in practice, they should be approached with care.

A trust can remove future asset growth from an individual’s estate and provide continuity and protection for beneficiaries, especially in complex family or business situations. However, trusts are subject to higher income tax rates, ongoing administrative costs, and increasing scrutiny from SARS.

They are most effective when assets are sold to a trust on a loan account rather than donated outright, allowing the founder to retain a claim while freezing the growth outside the estate. Over time, the loan can be reduced using the annual donations exemption. When trusts are used without sufficient scale or purpose, they can add cost and complexity without delivering real tax benefits.

Life cover: It depends…

Life insurance plays a critical role in estate planning, but it is also one of the most common sources of unintended estate duty. If a policy pays out into the deceased’s estate, it increases the estate’s value and may attract both estate duty and executor’s fees. This can significantly erode the intended benefit of the policy and also create liquidity issues.

In the latter case, this is because the proceeds are likely to be tied up in the estate during the administration process for some time before they can be paid out to the beneficiaries. By nominating beneficiaries directly, or by structuring the policy so that it is owned by a trust, the proceeds can bypass the estate administration process altogether. When done correctly, life insurance can provide the liquidity needed to settle debts, cover estate costs, or support dependents.

Doing the above does not necessarily save estate duty. The proceeds of a policy on a deceased person’s life are generally dutiable, even if the payout goes directly to beneficiaries. This is because such proceeds are treated as “deemed property” for estate duty purposes, regardless of who owns the policy or who is named as beneficiary.

The value included in the estate may be reduced by the total premiums paid by the person entitled to the proceeds, plus interest at 6% per year (commonly calculated on a compound basis). Premiums paid by the deceased themselves cannot be deducted.

There are, however, three key exclusions where policy proceeds are not treated as deemed property (and thus not subject to estate duty):

Spouse or child exemption:

If the proceeds are payable to a surviving spouse or child under a registered ante-nuptial or post-nuptial contract, they are excluded from estate duty. If there is no such contract, the proceeds are still included in the estate, but a spousal deduction may apply under Section 4(q); however, proceeds payable to a child become dutiable.

Business continuation policies:

Proceeds payable to a business partner, co-shareholder, or co-member of a close corporation are excluded, provided that the policy was taken out to fund the acquisition of the deceased’s business interest, and the deceased paid none of the premiums.

Policies fully independent of the deceased:

Where the policy was not taken out by (or at the instruction of) the deceased, the deceased paid no premiums, no proceeds are payable to the estate, and no benefit flows to any relative, dependent, or family-controlled company, the Commissioner may exclude the proceeds from estate duty.

In summary, while life insurance is an important estate planning tool, policy structure, premium payments, and beneficiary arrangements are critical in determining whether proceeds will attract estate duty.

Save on executor’s fees

Executor’s fees, while separate from estate duty, are another major drain on estates. These fees can amount to up to 3.5% plus VAT of the gross estate value and are often overlooked during planning. While these fees reduce the dutiable value of the estate, there’s no sense in spending R1 in order to save 20 (or 25) cents.

Reducing the executor’s fees requires thoughtful structuring: ensuring that assets such as retirement funds and life policies fall outside the estate, negotiating executor fees upfront in a will, and simplifying the asset base where possible. Although administering these assets outside the estate does not reduce the estate duty itself, the savings on fees can be just as meaningful to heirs.

Where there’s a will, there’s a plan

At the centre of all effective estate planning is a properly drafted and regularly updated will. A will that is outdated or poorly structured can undo even the best planning, leading to wasted abatements, liquidity shortages, and forced asset sales.

A good will does more than name heirs. It coordinates how assets flow, how taxes are minimised, and how cash will be made available when it is most needed.  Reviewing a will every few years, or after major life events, is one of the simplest yet most impactful steps a person can take.

Keep it simple

In practice, the most successful estate plans are rarely aggressive or overly complicated. They rely on a thoughtful combination of spousal exemptions, retirement funding, correctly structured life insurance, measured lifetime donations, and, where appropriate, carefully implemented trusts. Estate duty is not something that disappears overnight, but with deliberate planning, its impact can be softened substantially.

Ultimately, estate planning is not about avoiding responsibility; it is about ensuring that as much of your wealth as possible ends up where you intended it to go. With the right structure in place, estate duty becomes a manageable cost rather than a painful surprise and that alone is worth the effort.

 

Written by Steven Jones

Steven Jones is a retired tax practitioner and a member of the South African Institute of Professional Accountants.

While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.