All of our clients need to consider estate planning as part of their financial plan. For the younger generation who are just starting out, this may entail securing debts such as bond cover. For those with families, it may mean ensuring that dependants are taken care of and for those who are more mature; it can provide the opportunity to leave a legacy.
What is estate planning?
The starting point is to establish what is meant by estate planning. There are many definitions, but fundamentally it is the process of arranging your client’s affairs in such a way that, in the event of death, the estate can be wound up with ease and transferred to the people your client intended to benefit. There are a couple of obvious points that flow from this:
While your client knows for certain that he will die, he certainly does not know exactly when this will happen. The plan needs to be one that works for your client during his lifetime as well as on death, so whatever is put in place needs to be flexible to cater for changing and unpredictable life circumstances.
There will inevitably be debt to settle in the event of death and therefore there needs to be liquidity in the estate to do so – either assets must be sold, or cash must be created (for example, through life insurance).
Taxes and administration costs will reduce the amount available for distribution to the ultimate beneficiaries, therefore your client should strive to eliminate or limit them as much as possible.
Wealth created should be protected – for example, in the event of minors inheriting.
Clearly, where there are a number of needs, some sort of prioritisation must be done – which of the aspects above are most important to the individual and how best are they achieved?
The role of a will
The most basic starting point of any estate plan is to ensure that your client has a valid will, which clearly reflects his wishes and intentions and which is actually enforceable. Ideally you should make certain that you see a copy of the will to ensure that it does actually exist and that it reflects your client’s intentions accurately. You should also ascertain where the original is kept – if the client has it, make sure that he can produce it. The Master will only accept original wills, and if none can be found, then the deceased in fact dies intestate.
Does the distribution of your client’s assets make sense in the context of his marital regime? In other words, if he is married in community of property, he cannot bequeath for example the
holiday home to his children. He can only bequeath his half of the holiday home to his children. What is his true intention and how does the will give effect to this intention, bearing in mind the practical implications?
Can his estate afford any specific bequests that are made? In winding up the estate, the executor must first pay any creditors (including SARS, any accrual claim in favour of the surviving spouse etc) and only then will beneficiaries receive their inheritance. If your client has left R20 000 to each grandchild, and there are 6 grandchildren, these bequests will be satisfied before the residual heir will receive. If there is insufficient liquidity, assets might have to be sold and the residual heir, in many instances the surviving spouse, could be left in a precarious financial position as a result.
Are there any maintenance provisions in terms of a divorce order that must be complied with? Again, these will be met before distribution to the heirs.
Who is the executor and is this person qualified to do the job, or is the person sufficiently well informed to appoint an appropriate person to act as his agent in winding up the estate? Remember that fees are negotiable, but that only the executor is bound to the 3.5% (plus VAT) executor’s fee. An agent acting on behalf of the executor may in fact charge more, especially if he charges his professional fee instead of a fixed fee.
Securing a beneficiary’s inheritance
Are the beneficiaries competent to receive the benefits directly? Remember inheritances in favour of minors (people under the age of 18) could be paid into the Guardians Fund, with very little access to the funds until age of majority. Clients should make use of a testamentary trust to overcome this obstacle.
In addition to wanting to avoid the Guardian’s Fund, at what age are people mature enough to receive benefits and to deal with them appropriately? Would an 18 year old be competent to deal with a sizeable inheritance, or would it be squandered? A testamentary trust can serve the purpose of protecting wealth for future generations; at the same time allowing the client to retain effective ownership and control during his lifetime. If the need for the testamentary trust passes and the beneficiaries achieve the identified age before the death of your client, he can simply amend his will to remove reference to it.
The tax implications in estate planning
Income Tax and Capital Gains Tax (CGT) will be payable by the estate each year until it is wound up. Death results in a deemed capital gains tax event, the deceased "disposes" of his assets to his estate, and unless his spouse is the heir to these assets (in which case there will be a CGT rollover), CGT will be calculated on the value of the assets as at date of death and will be paid in the tax return in that relevant year. Remember that for the 2011/2012 tax year, the effective rate of CGT for a person at a 40% marginal rate of tax is 13.3%, with a R300 000 exclusion at death. This can be a large drain on the liquidity in a deceased estate, and careful consideration should be given to including CGT in your liquidity calculations.
Outstanding tax returns and tax disputes can severely hinder the speedy winding up of an estate, so encourage your clients to keep their tax affairs in order and up to date.
Estate duty, while only payable once the estate has pretty much been finalised, is also going to impact negatively on the liquidity in the estate. If the surviving spouse inherits the estate, then the effect of section 4(q) of the Estate Duty Act is that no duty will be payable. It will rather be postponed until the death of the last dying spouse.
Remember that a South African resident will pay estate duty on his world wide estate, not just his South African estate, and with the world becoming a global community and legislation such as FICA, it is virtually impossible for a resident to successfully "hide" his offshore assets. It is best to encourage your clients to acknowledge the extent of their estates, to legitimise assets that need to be considered, and to cater for the taxes that will in any event be levied.
Securing a holistic estate plan for your client
In order to make sure that your client has a holistic estate plan; your client will need to consider different aspects of estate planning at different stages of their lives.
Ultimately any estate plan needs to take into account the following:
A mechanism to ensure that effect is given to the client’s wishes – in many cases a well drafted and thought through will would suffice; and
Cash to ensure that there is liquidity in the estate to pay creditors and the administration costs and to settle any specific bequests, ensuring that the beneficiaries are actually able to receive the assets intended for them.
Life insurance is the ideal product to create such liquidity: it can be used to settle creditors directly (such as bond cover); or to pay to the estate, so that the executor has the cash to settle debt and wind up the estate without delay; or to pay directly to dependants to ensure that they have cash flow immediately after the death of a breadwinner, until such time as the estate is wound up, or for a longer period, as the need may be."
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