ASK THE RIGHT QUESTIONS EARLY
IT IS NOT JUST ABOUT TRYING TO AVOID TAX
By Deidré Valentine
05/09/2026
They say death comes like a thief in the night. Although this is true for most people, there are some who, during their final days on earth, have the opportunity to put their affairs in order. While it is never easy to lose someone close to you, I believe a person’s family, together with a financial planner, can make the estate administration process run as smoothly as possible by considering a few key points as part of a thorough planning exercise.
As an example, suppose Client A is suddenly diagnosed with a very aggressive form of cancer, with little the doctors can do for her. Her adviser now needs to sit down with her children to make sure all her affairs are in order and to understand how things would work in practice if she were to pass away. Client A owns an apartment (R2 million) and a discretionary investment (R4 million) in her personal name. It has also been confirmed that she should be able to use the full R7 million abatement for estate-duty purposes (her late husband’s section 4A abatement of R3.5 million carried over), so there will most likely be no estate-duty implications upon her death.
Death has no pockets, but the composition of your portfolio certainly determines how your money and assets are passed on to the next generation, and whether this results in unnecessary delays. Although estate duty is not a concern in this scenario, we still need to consider the practical implications of inheritance. For example, whether products with beneficiary nominations should be considered so that the estate administration process can be bypassed altogether. We therefore decided to transfer most of the money (about R3 million) from Client A’s discretionary investment to a retirement annuity (RA), which would then build up as unused credits with the South African Revenue Service (SARS). This move essentially had three benefits:
- Avoid a lengthy estate administration process
Moving discretionary funds to an RA prevents the amount from becoming tied up in an estate at all and instead allows it to be paid directly to the beneficiaries. Although money in an RA is typically paid to the beneficiaries (according to the percentage allocation indicated), the final distribution is still determined by the retirement fund’s board of trustees. Beneficiaries are therefore not necessarily 100% guaranteed that the inheritance will be distributed as planned. We then went one step further and retired from the RA, transferring the proceeds to a living annuity to secure the beneficiary payments (as this payout does not have to be approved by a board of trustees).
- Unused credits and section 10C for her current monthly income needs
That said, a living annuity is not without disadvantages. The income we would now draw for Client A from the living annuity would, under normal circumstances, be taxable for income-tax purposes, whereas the income from her discretionary investment was tax-free (for income-tax purposes). This brings me to section 10C of the Income Tax Act. Because we initially transferred a large lump sum to a retirement annuity, Client A still had unused credits with SARS. Even though the RA was transferred to a living annuity, this tax benefit does not necessarily fall away.
- Unused credits and section 10C for the payout to beneficiaries (on death)
If, on the person’s death, there are still unused excess contributions and the beneficiaries choose to receive the living annuity as a lump sum, these unused credits can be used to reduce the taxable portion of the lump sum. This may mean that a larger portion of the living annuity is paid to the beneficiaries tax-free or at a lower effective tax rate. What we do need to remember is that the amount used for this purpose may have estate-duty consequences (in other words, it may once again form part of Client A’s estate). However, because we knew that Client A did not have an estate-duty problem, this plan made sense. The important distinction is that the unused credits are not transferred to the beneficiary.
Remember: If a person has unused credits, these can be set off against the individual’s living-annuity income. Once the person dies and a beneficiary wants to take a cash lump sum, the unused credits can be set off against the lump sum, but the amount is then regarded as deemed property in the deceased’s estate. It is therefore not a sensible choice if estate duty is already an issue. In this case, the estate was below R7 million, so it made sense for the beneficiaries to take the lump sum if they wished.
If a beneficiary continues to receive income from a living annuity, he or she cannot set the unused credits off against that income – but at least it is not deemed property in the client’s estate. What is very important with this kind of planning is that all parties are on the same page and also take the tax implications of their decisions into account. In cases where some beneficiaries choose to take the full amount in cash while others choose to continue receiving income from the living annuity, it is essential to understand how the payouts will be taxed and exactly which benefit accrues to which beneficiary. We have also experienced investment platforms struggling at times with the payouts and the related tax treatment, so make the effort to communicate in advance with the platforms, all beneficiaries and a financial adviser so that the outcomes are clear to everyone and to ensure that the inheritance is distributed as fairly as possible.
Estate planning is therefore not simply about trying to reduce estate duty. It is about the full picture: the types of products in which assets are held, their tax consequences, how quickly beneficiaries can gain access to money and, ultimately, whether the client’s wishes can be carried out in practice. Every family’s circumstances are different, so there is not necessarily one perfect solution. The value lies in asking the right questions early and having a plan before the time comes to put that plan into action.
Deidré Valentine is a certified financial planner at Woodland Wealth. Contact her at info@woodlandwealth.co.za.
Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.