Why estate planning is crucial in times of unexpected events
Sean Hanlon, BrightRock Executive Director: Sales and Distribution
In the past two years, the need for sound financial planning has become very evident. Events such as the unexpected KZN floods, the July 2021 riots and the COVID-19 pandemic have all put estate planning in the spotlight, with a greater call for financial advisers to help get their clients’ will and testament, and their life insurance, in order. Houses, vehicles and businesses are just some of the things that need to be insured, safeguarded and potentially transferred to the relevant dependent in the event of a client’s death. Unfortunately, millions of breadwinners and household providers in South Africa still don’t have their estate planning in place. In fact, it is estimated that 1.3 million South African government employees do not have a will, which could leave their dependants without an income, with their assets frozen, or with the wrong person inheriting from the estate.
Here are three things you should consider when helping your clients plan what happens to their estate if they pass away.
1. A financial plan is the cornerstone
To ensure that your clients’ needs, and those of their loved ones, are covered in the event of any worst-case scenario, you need to ensure that everyone that is dependent on them, is taken care of. Putting together a holistic financial plan of your client’s needs will help you in meeting their goals. Ensuring you have a comprehensive view of each client’s family and their financial needs, such as the cost of their children’s education, their bond and other debt, and expenses will help you create a solution that precisely meets each of their needs. This means understanding how much cover each person in their family will need, should it happen that your client does not earn an income anymore, due to illness or an injury. The obvious starting point is death cover that provides for the immediate expenses where the beneficiaries are clearly stipulated and ensuring they have drawn up a valid will that explicitly addresses the disposal of major assets. You can also help your clients look into various other scenarios, such as the settlement of joint debts or bonds affected by the possible loss of a primary income. It’s equally important that your clients do not overlook basic household expenses and healthcare costs in their financial plan.
If your client is married or has a spouse as defined for tax purposes, this will also play a significant part in estate planning. Being married in community of property or out of community of property, or being divorced, means that there are people that could have a claim to proceeds of your client’s estate even if your client doesn’t make provision specifically for this in their will. As their financial adviser, make sure that you understand their marital status and regime, and include these considerations in the financial plan.
Critical to consider is the liquidity of the estate when your client does pass on. It’s all well and good to leave your dependents with a house over their head, but if that house needs to be sold to pay SARS, your loved ones may still be left in financial trouble. A life insurance policy can help with this, to ensure that cash is paid into the estate to make sure that assets actually go to the people that you want them to go to. A few insurance companies also offer last death policies which can be taken out on the lives of a spousal couple so that where the residue of the estate is left to the surviving spouse, the policy only pays out when that person dies. These types of policies are generally cheaper than each person taking out cover on their own life, and fulfil the need by only paying out when the tax burden arises.
When looking at your client’s business insurance policies, such as any buy and sell cover or keyperson cover that they might have on their life, make sure that they are structured optimally so that they don’t trigger unexpected estate duty. Again, when SARS needs a substantial portion of a deceased’s estate, the dependents that should have been provided for will be left without.
Revising this financial plan regularly will make sure that any adjustments that need to be made are made before any problems arise.
2. Consider both your client’s short- and long-term financial expenses
Estate planning takes into consideration both life and funeral cover, ensuring that clients are able to settle their debts and take care of their family’s living expenses after they die. Many people do not take into account the extra costs and significant administrative work involved with finalising an estate – by following a step-by-step approach with your client, you can ensure that they are aware of the exact costs and procedures required.
These costs can include executor’s fees, which are the costs charged by the person appointed to manage the winding up of your client’s estate. Then there are administrative costs, such as fiduciary costs and estate duties, which can be managed to a large degree if their assets are appropriately protected in a trust. The extent of these costs depends on the size of your client’s estate and there are insurance solutions available for these expenses.
3. Select a suitable and trusted executor
Use the complexity of your client’s estate, as a rule of thumb for their selection of an executor. It might be beneficial for their estate if the executor has knowledge of tax and the administrative process required to finalise your client’s estate. However, be sure that the decision is up to them, and they can select whoever they want – be it their spouse, a friend, a trusted acquaintance, their bank, a lawyer, or a trust company. Your role is to help them select the most suitable person.
There are many immediate expenses that could follow your client’s death, such as funeral costs, debt repayments and other day-to-day expenses. Be sure to help them make provisions for this. BrightRock, for example, provides for immediate pay-outs of up to R50 000 on death, which could be very helpful in terms of your client’s immediate expenses.
Becoming more and more common these days is that the people who benefit in terms of a will are living overseas. There are companies that you can consult with to find out how to move funds overseas when your client dies, and what the expected tax implications of this will be. This is quite a specialist function, and if you don’t focus on this field, it might be a good idea to consult with someone who does for the peace of mind of the family, and so that everyone knows what will happen when your client does. You might also need to increase any insurance cover that will pay to the estate when your client dies so that these tax payments don’t erode what would be needed to look after your client’s dependents.