Testator beware! The hidden tax consequences of limited interests

Sufficiently providing for one’s loved ones in the event of death is often the greatest legacy one can leave behind. However, failure to undertake proper estate planning can often create unintended consequences- especially that of an increased tax bill for the heirs!

Usufructs, and other limited interests, are a popular way of providing security, especially to one’s immediate family, when one intends to bequeath ownership of a residential property to someone else. However, this can create a high Capital Gains Tax (CGT) liability for the heir of the property as the starting value for CGT purposes is the value of the property, less the value of the usufruct at the time it was created. Thus one’s heirs may be confronted with an unexpectedly higher tax bill when they wish to sell the property sometime in the distant future.

For Estate Duty purposes, the value of any usufruct or other limited interest, such as a fideicommissum, will also be included in the calculation of the duty payable by the estate of the beneficiary of the usufruct, or other limited interest. Even where the beneficiary of such a usufruct renounces it, it may also give rise to Donations Tax!

The long reach of Capital Gains Tax, Donations Tax and Estate Duty mean that it is best to consult a professional when drafting one’s will. Here at MDW Attorneys Inc we pride ourselves in our experience and expertise in matters dealing with wills, property, trusts and estates.

For a consultation, contact Meyer at meyer@mdwinc.co.za.
prepared by Kai Howie

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)