Estate Planning: not so simple

By Staff Writer

From Personal Finance
October 8 2007
By Laura du Preez

Estate planning forms an essential pillar of every person’s financial plan, independent financial adviser Debbie Netto-Jonker told the recent Personal Finance/acsis Financial Planning Club meetings.

Estate planning – or planning how your assets should be distributed after your death – should be considered alongside your retirement planning, disability planning and other aspects of financial planning so that you have a holistic financial plan, Debbie Netto-Jonker says.

A good financial planner or lawyer can help you deal with the technical aspects of estate planning, but there are many other practical issues that you should deal with to ensure that your affairs are in order.

The first is that you should have a valid will, Netto-Jonker says. Shut your eyes and pretend you are dead; ask yourself if you know where the original signed copy of your will is and whether your next of kin know where to find your original will.

The original will needs to be presented to the Master’s Office before authority can be given to the executor of your estate to start administering your estate after your death.

Next, ask yourself if you are still happy with the beneficiaries you have named, Netto-Jonker says.

Also consider whether your will is properly witnessed. The will should be signed by you in the presence of two witnesses who are over the age of 16 and not beneficiaries of the will, and you and the two witnesses should initial each page.

When you are planning how your estate should be distributed, there are a number of things you should consider, Netto-Jonker says. These include:

If you are married, the way in which you got married will have significant implications for your estate plan, Netto-Jonker says.

If you are married in community of property, you and your spouse jointly own all your assets and are jointly liable for your debts. When you die, half of the joint estate less half of the liabilities (what you owe) will be regarded as being that of your spouse.

If you are married out of community of property, without the accrual system, you and your spouse each retain separate estates.

You could also be married out of community of property but with the accrual system – all marriages entered into since 1984 are regarded as being out of community with the accrual system, unless you specifically state that you are marrying under another system. In this case, you and your spouse enter the marriage with separate estates, but the assets accumulated during the marriage are shared.

If you are the higher-earning partner and you are married in this way, on your death, part of your estate will be regarded as belonging to your spouse in terms of a matrimonial accrual claim.

After you die, your assets and your debts are collectively referred to as your estate and somebody needs to collect all these things and make sure your debts are paid and your assets transferred to the right people in terms of your will. That “somebody” is referred to as the executor of your estate.

In your will you can appoint anyone as an executor, but it is worth checking that that person or entity is willing to do the job, Netto-Jonker says.

Some companies or professionals will not be executors on smaller estates because the fees are too low.

Before you decide who to appoint as an executor, remember that executing an estate is “a paper chase of
note” and “not for the fainthearted”, Netto-Jonker says.

In practice, three groups of people are appointed as executors:

Many people appoint their bank or their trust company as an executor. The service your family gets may vary depending on where and who you are, so check this before you appoint such a company.

Others appoint a trusted professional (a financial adviser, lawyer, or an accountant) along with a surviving
spouse. Netto-Jonker says this approach works quite well. The surviving spouse knows the family’s requirements and the trusted professional has the experience to assist in winding up the estate effectively. Choose someone with integrity, ethics and savvy.

In some cases, the surviving spouse is appointed as the only executor of an estate. “Generally, in our experience, this is not a very good idea because the surviving spouse has just been through a very traumatic experience with the loss of the loved one and, generally, we are finding that this is not conducive to making appropriate decisions,” Netto-Jonker says.

If you appoint anyone other than your spouse or a family member who is willing to assist for no charge to be the executor of your estate, your estate will have to pay the executor the fees set out by law. The maximum fee is 3.5 percent of the assets in your estate plus VAT (a total of about 3.99 percent).

Netto-Jonker says one effective way of reducing the executor’s fees your estate will pay is to nominate beneficiaries on your life insurance policies and retirement annuities.

The proceeds of these policies will be paid directly to the beneficiaries and will not form part of your estate for the purposes of executor’s fees.

Netto-Jonker says it is also worthwhile when you appoint an executor to negotiate lower fees, especially on larger estates.

Your estate will have to pay estate duty or death taxes at a rate of 20 percent of the assets that are left to your heirs.

However, any bequest you make in your will to your surviving spouse qualifies as a deduction for estate duty purposes, reducing the estate duty your estate could be liable for, Netto-Jonker says.

As from March 1 this year, the estate duty exemption was increased to R3.5 million – that is, you do not pay duty on R3.5 million of assets you leave to your heirs. 

If you have a large enough estate, an effective way to make use of this exemption is to leave an amount equal to the exemption or R3.5 million to a third party such as a trust for the benefit of your heirs, or your children. Then you can leave the balance of your estate to your surviving spouse, Netto-Jonker says.

If you leave your full estate to your surviving spouse, you simply defer the estate duty payable because when your surviving spouse dies, duty will be payable should his or her estate exceed R3.5 million.

Before you consider this option you must ensure your surviving spouse has enough assets to provide for the rest of his or her life.

It is also important to remember, Netto-Jonker says, that when you die you are regarded as having disposed
of your assets for capital gains tax (CGT) purposes and hence become liable for CGT on any taxable capital gains realised.

However, any assets you bequeath to your surviving spouse qualify for roll-over relief, she says. This means that your estate will not pay CGT on these assets. Instead, your surviving spouse will be liable for any gains realised when he or she sells the asset or dies.

CGT can cause cash flow problems in your estate because if there isn’t enough cash to pay the tax, assets will have to be sold to pay the taxman.

Many people overlook the fact that their surviving spouse will need cash to live on after they die while the estate is being wound up and this can lead to serious problems and inconveniences.

Netto-Jonker says once your bank gets wind of the fact that you are dead it will freeze your account.

It takes time to finalise most insurance payouts. This is especially so when the circumstances surrounding a death need to be investigated.

Netto-Jonker says you should provide cash for your surviving spouse that will support him or her for two to three months. For this purpose, the spouse should have his or her own bank account.

Alternatively, the surviving spouse should have a unit trust investment in his or her name that can be sold quickly to realise cash when this is needed.

Netto-Jonker says trusts are an effective tool in estate planning. You can transfer assets to a trust you have established by lending the trust money to buy your assets from you.

The trust owes you money and that loan account will still be an asset in your estate and will still attract estate duty when you die.

However, by putting an asset in a trust, you freeze the value of the asset at the value it had when you transferred it. Any future growth in the value of the asset takes place in the trust.

You can then also reduce the value of a loan account by making donations to the trust each year, which the trustees can use to repay what the trust owes you. You can donate up to R100 000 a year free of donations tax to the trust.

It is important to remember, Netto-Jonker says, that you lose control and ownership of assets you transfer to a trust because the trust needs to be run by at least three trustees and not by you alone.

Netto-Jonker says if you have a complex family arrangement – for example, if you have remarried and
have a former spouse and possibly children from your former and current spouse, you need to take more care with your estate planning.

Don’t try to cut out from you will an estranged spouse or former spouse for whom you are responsible for maintenance.

If you fail to provide adequately for your surviving spouse or minor child after your death, your estate may be exposed to a claim from either your spouse or your child, Netto-Jonker says.

If you want to provide for any family members who lack the ability to manage their own finances, don’t leave money directly to them. Rather put it in a trust for their benefit, Netto-Jonker says.

You should also use a trust if the person you want to provide for has their own business and could face claims from creditors or if you want to leave assets to a minor child or grandchild, she says.

If you belong to a retirement fund, you may nominate your spouse or children as beneficiaries of the fund, but when you die, the trustees of your fund will decide who will actually benefit from the fund, Netto-Jonker says.

Section 37C of the Pension Funds Act obliges the trustees of your retirement fund to distribute your fund benefits equitably to all your dependants. The trustees have a duty to determine who is dependent on you and
even who might have become dependent on you had you survived.

The Act provides that even your previous spouse, your parents and children born out of wedlock – or your mother-in-law may be included in the definition of dependant.

Netto-Jonker says you should draft a letter to the trustees of your fund informing them of who you would like to benefit from your fund proceeds in the event of your death. This will help the trustees in making a determination, but it only serves as a guide and the trustees are in no way bound by this letter.

It can, however, be useful if you explain to the trustees that you were, for example, paying for your mother-in-law’s DSTV connection because you could afford to do so, but in the event of your death, you would prefer that the benefits of your fund are used to support your dependants, she says.

Don’t forget to leave some instructions to your family about funeral arrangements after you die, Netto-Jonker says.

Leave a letter with instructions on these and other practical issues, like what to do with your ashes, so that your family can let go after you die, she says.

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