Can I increase my living annuity with unit trusts?

Question:

A question herewith please of a move to transfer taxable unit trust funds to a living annuity where no estate duties would be payable on my eventual demise: I am presently retired and receive a monthly payment from a living annuity. I also have a fair sized amount invested in a normal unit trust. It seems that it would be possible for me to withdraw all of the unit trust funds and use that lump sum to once off buy a retirement annuity. Then, since I am already in the 60's, I could "retire" again immediately on this retirement annuity and have the entire retirement annuity added to my existing living annuity. I would then effectively have transferred the original unit trust, which would have entered into my estate on my demise and be due for estate duties, into my living annuity which would fall outside of my eventual taxable estate. Would such a move in any way make any tax sense? Thanks.

Answer:

Wim, Such a scheme would be possible in theory, and you could avoid estate duty in this way, but this may not serve you. You will be taxed on the income you draw from your (increased) living annuity and the amount you leave behind in your living annuity will also be taxed. If your beneficiary elects to receive a cash lump sum, this will be taxed as though you had received this amount as a retirement cash lump sum (the highest tax rate - on amounts above R945 000 - is 36%). If they chose an annuity, they will be taxed on the annuity income. You need to compare this to Estate Duty: the first R3,5m of your Estate is exempt, the balance is taxed at 20%. Bequests to your spouse are tax-exempt. So you need to work out if transferring to a living annuity would actually benefit you tax-wise. Even then, you may not be able to pull it off. Legally, your living annuity can only accept proceeds from a retirement fund or another living annuity. SARS may look through the form of your transaction (or rather scheme, which is what this is) at the underlying substance, and disallow it, especially if the primary reason for moving your money to a living annuity is to avoid tax, rather than to secure a retirement income. You would then have incurred a lot of unnecessary costs and hassle.