RA Solution

Source: Discovery Life

This is the start of a series of articles showing how flexible RAs have become since the rule changes last year and how they should be an integral part of planning for a client.


RAs are no longer just a tool to reduce a client’s taxable income, as was the case in the past.

Background

Since 1 January 2009 all payouts from RAs on death are free of estate duty

Subsequent to all the rule changes on RAs, on death, the full cash proceeds of the policy can be paid to dependants if they so wish

In terms of the Second Schedule to the Income Tax Act, any taxpayer contributions to a RA which did not “rank for deduction against the taxpayer’s income in terms of section 11 (k) or (n)of the Act” will pay out tax-free in addition to the R300 000 allowed. Section 11 (n) of the Act allows a deduction up to a maximum of 15% of non-retirement funding, taxable income. (The section has been paraphrased.)

Scenario

Client aged 84 has R3 million to invest. He does not need the money, but wants to invest it for his family. He has an estate duty problem.

Solution

The client invests the R3 million in a single premium RA. With this simple investment, the client has achieved five benefits:

The R3 million has been removed from the client’s estate, and will be free of estate duty when it pays out. This equates to a saving of R600 000, without taking growth of the investment into account

The investment will be in the untaxed portfolio in the insurers hands

When the client dies, his dependents can draw the full proceeds of the policy in cash if they so choose. This makes it a fully liquid investment for them

The policy proceeds will pay directly to the dependants on death and not be subject to executor’s fees in the deceased estate. Assuming no growth, and the normal executor’s fee at 3,99%, this equates to a saving of R119 700

Finally, the R3 million paid into the RA would have been well in excess of the allowable deductible amount (see above). It would be safe to assume that it would not have been tax deductible going into the RA. This would mean that it would come out tax-free on top of the R300 000 allowed. If a small part of it was deductible, that bit would not come out tax-free, but then the taxpayer could still use the R300 000 tax-free allowance (assuming that has not been used before).

Benefits

The client has been given an investment in an untaxed portfolio, which is fully liquid for the family, free of executor’s fees and estate duty, and in most cases, tax-free when it pays out. No other investment product can match this.

Conclusion

RAs are an integral part of a client’s estate planning since the regulatory changes last year. All elderly clients should be using them as an estate duty shelter.