Estate planning involves structuring and managing your assets while you are alive, and putting measures in place to ensure your wishes are carried out after you pass away. It also ensures that there are no unexpected surprises your family will have to deal with. Although it is often perceived as the final stage of financial planning, it should instead be seen as a continuous process of managing your assets and liabilities throughout your lifetime. As detailed in this article, your estate plan can be used to achieve various financial goals.
It is important to determine the liquidity within your estate. There is a lot to consider, such as capital gains tax, estate duty and executor’s fees. A complete estate plan with detailed calculations will paint a very clear picture. The last thing you want to do is to leave your dependants with an estate that does not have enough liquidity when you pass away.
You might have a big estate in terms of value, but with little or no liquidity in the estate. It is thus important to understand how quickly tangible or intangible assets can be liquidated to create liquidity to provide for your family. Managing day-to-day living expenses is important. Once the deceased’s bank account is frozen, it can take several months before the executor is able to pay creditors. To avoid potentially adverse interest and charges, it is recommended that dependants have a plan in place to maintain these payments.
It is not uncommon for dependants to find themselves in a position where they need access to funds from the estate to meet their day-to-day living expenses. It can be extremely stressful if family members have to deal with the loss of a loved one as well as financial concerns.
Certain investments, like endowments, retirement annuities, living annuities and life assurance policies offer the option to nominate beneficiaries. It is very important to understand how the beneficiary nomination works for each policy. For example, if you nominate a beneficiary on your retirement annuity, section 37C of the Pension Funds Act applies. The distribution of retirement funds is determined by the trustees of the fund, who will identify your financial dependants and allocate the benefits accordingly. This may not be in line with your beneficiary nominations.
In the case where your dependants are minors, it is crucial to consider creating a testamentary trust, which will make provision for your dependants until they are old enough to manage their financial affairs on their own. Updating your beneficiary nominations on a regular basis (as your children become older, or when you get married or divorced) is equally vital.
Essential documents to include in your estate planning file are, among others, a copy of your will, confirmation of executors, your birth certificate, marriage certificate, antenuptial contract, divorce certificate, maintenance orders, title deeds, trust deeds, vehicle registration and ownership documents and share certificates. Other information to consider making available includes gun licences, codes for your safe, loan agreements, digital passwords, logon credentials, alarm codes and a list of expenses or creditors, especially if you are responsible for the monthly household and/or business expenses, to ensure the family can continue with these payments.
Inheritance of minors
Structuring your estate to ensure that your children are adequately provided for in the event of your passing is imperative. There are some things you just cannot leave to chance. It is important to bear in mind that children under the age of 18 may not inherit lump sum pay-outs or other assets directly. This is where a testamentary trust is incredibly valuable.
It is also very important to nominate a legal guardian in your will for your minor children. The legal guardian can also be nominated as a trustee of a testamentary trust.
Reducing tax liabilities
Although it is not possible to avoid paying tax altogether, proper estate planning will enable you to structure your estate in the best way to reduce tax liabilities.
Estate duty (which is essentially tax paid on the transfer of wealth from your deceased estate to your beneficiaries) is levied at 20% of the dutiable amount of an estate up to R30 million, and at 25% on the dutiable amount exceeding R30 million. The dutiable value of your deceased estate will be calculated by adding the value of your property, deducting any allowable expenses, and then deducting the section 4A rebate (currently R3.5 million). Note that South African residents are taxed on worldwide assets, so it is important to consider specialist advice on situs taxes. If you own UK and/or US assets, you could potentially become liable for taxes in these jurisdictions, including income tax, capital gains tax and estate duty. The situs of an asset is generally the place where an asset is deemed to be located for legal purposes.
There are various options that can be used to reduce the estate duty liability and therefore maximise the inheritance of your beneficiaries. Retirement funds (pension, provident and preservation funds, and retirement annuities) are not considered property in your deceased estate and will not be subject to estate duty. Living annuities are not estate dutiable either.
It is essential to consider that if you die intestate (i.e. without a valid will), your estate will devolve in terms of the rules of intestate succession, as stipulated in the provisions of the Instate Succession Act (Act 81 of 1987). This means your estate will be divided among your surviving spouse, children, parents and/or siblings according to a set formula, which is an even more onerous and stressful process.
Losing a spouse or family member is traumatic enough but being unprepared for the financial realities of death can make it even more devastating. Estate planning is one of the most powerful tools we have if used correctly. It is even more powerful when used in conjunction with a holistic financial plan. Contact an adviser to ensure your wishes are carried out as you would like, rather that leaving it to chance.