28 October 2009
Currently, the first R3.5 million of a deceased estate is exempt from the 20% estate duty as well as any amount bequeathed to the surviving spouse. Before the amendment, if the first dying spouse left his or her entire estate to the survivor, the R3.5 million abatement would be lost.
In order to illustrate the effect of the previous provision and how the amendment improves it, assume that the husband has an estate of R10 million and the wife no assets, and that the husband dies first. If the husband bequeathed his entire estate to his wife, no duty would be payable and her estate would then be worth R10 million. On her death, her estate would have access to R3.5 million, leaving a dutiable portion of R6.5 million. In other words, between them the spouses would have used only R3.5 million of the potential R7 million available to them.
To avoid this situation and ensure that they had access to the full R7 million available to them, the husband would bequeath R3.5 million to a trust and the remaining R6.5 million to the wife. His estate would still not be dutiable: as to the R3.5 million, because of the abatement; and as to the R6.5 million, because of the surviving spouse exemption. But when the wife died, her R6.5 million estate would enjoy the R3.5 million abatement, leaving a dutiable amount of R3 million. In this way, the couple would ensure that only that portion of their joint wealth in excess of R7 million would be dutiable. But to achieve this happy result, they would have to rely on a bequest to a trust, of which the wife was usually a discretionary beneficiary in any event.
The amendment eliminates the need for this use of a trust by providing for the “portability” to the surviving spouse of any unused portion of the abatement of the first dying spouse. Using the same figures, if the wife inherits the entire estate of R10 million, when she dies her estate will have access to that portion of the husband’s abatement that his estate did not use, plus her own R3.5 million. The total abatement would then be R7 million, leaving a dutiable portion of R3 million. If the husband had bequeathed, say, R2 million to his children and the rest to his wife, her R8 million estate will have access to the R1.5 million unused balance of his abatement plus her own R3.5 million, leaving a dutiable portion of R3 million.
The amendment makes provision for multiple surviving spouses and multiple predeceased spouses. If there is more than one surviving spouse, any unused balance will be split equally between the surviving spouses. Where a person has been a surviving spouse more than once, that person’s executor has a choice of which predeceased spouse’s unused balance to use, provided the executor submits the estate duty return of the spouse chosen.
The amendment fails to provide for one situation that could arise, namely the simultaneous deaths of both spouses. The section is clear that, for portability to occur there must be a first dying spouse and a surviving spouse. We have brought this seemingly inadvertent omission to the attention of National Treasury, and may surely expect an amendment in the near future.