You may think you have taken care of what will happen to your assets when you die by writing a will. But have you seen what the liquidation and distribution account of your estate will look like if you were to die tomorrow?
Independent financial planner Arno Burger says you need a financial planner to draw up such an account for you to show you how your assets will be dealt with after you die and the consequences - many of which are unintended - of stipulations in your will.
Burger, who is the managing member of Fidius, a fee-based financial planning practice in Pretoria, says it is not enough to get a lawyer or a bank to draw up your will and to focus on the legal finalisation of the estate without taking your financial plan, your objectives and the long-term consequences of your wishes into account.
You need a qualified financial planner to help you go through the liquidation and distribution of your estate to show you the implications.
Two things to check
You need to check two things. The first is whether there is enough cash in your estate to settle your debts, including those, such as capital gains tax (CGT), that arise on your death, he says.
The second crucial part of estate planning is to calculate the value of and the application of the assets after distribution according to your objectives. This modelling of possible future scenarios must include income, growth and tax calculations and comparisons to help you make informed decisions.
CGT is now becoming much more of an issue, Burger says, as most people who had homes valued at R2 million before the introduction of CGT in 2001 have seen the value of those homes grow to more than R4 million.
This means they have made more than a R1.5-million capital gain on their primary residence and will be liable for CGT on any capital gains above this amount.
On your death, unless you leave your assets to your spouse, you are regarded by the taxman as having disposed of them and this makes your estate liable for CGT on any taxable capital gains.
If there is not enough cash in your estate to settle your debts, any transfer costs, your last expenses, executor's and masters' fees, or pay the CGT, the executor of your estate may have to sell assets to realise some cash, he says.
This could mean that an asset you planned to leave to, for example, your spouse or your children may have to be sold. This asset could even be the house you intended your family to live in, Burger says.
Common mistakes
The most common mistakes people make in estate planning is failing to make any plans or assuming that things will work out without the proper planning and calculation of possible scenarios, Burger says.
The consequences of this, he says, are that your dependants could have much less at their disposal than should be the case.
The focus of estate planning should be the stipulations of your will with your objectives in mind, Burger says.
First, you need to make sure that you have provided support for your dependants. Your objectives should include considering their needs.
If you have a spouse who needs to be supported, for how long will he or she need support and how much do you need to provide for this purpose? If you have dependant children, how old are they and when will they become self-sufficient?
If you have minor children, you may need to consider setting up a testamentary trust (a trust created in terms of your will) for them, rather than leaving all your assets to your spouse, Burger says.
If you leave all your income-generating assets to your spouse, he or she will be taxed on all the income generated. But if some of the income is generated in the hands of your minor children, you can achieve a better after-tax income.
Setting up a trust
Burger says many people set up inter vivos trusts (trusts set up during your lifetime) and transfer all their assets to these trusts, without realising that when the income generated by assets in the trusts vests in the hands of children, this income will be deemed for tax purposes to be that of the parent who donated the asset to, or settled it in, the trust.
Another common mistake people make, Burger says, is that they fail to take into account how the trustees of their retirement fund will distribute the wealth they have accumulated in their funds.
As a fund member, you may leave your house to your spouse and the rest of your estate to your children, thinking that the money in your retirement fund will provide an income for your spouse, he says.
However, the trustees of your retirement fund might decide to split the money in your fund between your spouse and your children, and this could mean that your spouse will not have enough money to support herself or himself.
The trustees will not necessarily distribute the money according to the beneficiaries you have nominated, but will act in line with the stipulations of the Pension Funds Act, which obliges trustees to distribute retirement fund assets equitably between all dependants. You must consider who will qualify as a dependant in terms of the Act.
If you have named beneficiaries of life assurance policies, assets will be distributed to them and this may also not be in line with stipulations of your will.
Business assets
If you own a business, you need to make sure that you separate your business assets from your personal assets, Burger says.
For example, if you are a professional such as an attorney, you may be in a practice in partnership with other attorneys.
When you die, you could leave your share of the partnership to your spouse, but it is unlikely that your spouse is qualified to take over your role in the business.
You need to have a succession plan in terms of which the other partners can buy out your share when you die, Burger says.
In addition, part of that plan needs to be to provide cash to enable your partners to buy out your share because you do not want to create a situation in terms of which the partners owe your estate for your share of the business years after your death.
Such plans and contracts must be drawn up with the advice and the assistance of your financial planner, who must consider legislation which determines in what circumstances cash provided for in life policies is free of estate duty in your estate, Burger says.
A qualified financial planner can take full responsibility for the advice to be correct, he says.
If you are married, another key issue you need to consider is how you are married and whether any part of your estate will on your death accrue to your spouse in terms of your marriage contract.
Burger says people often don't consider the accrual system and how it can be used to their benefit.
No one is too poor to plan
Don't put off consulting a financial planner about any aspect of financial planning, including estate planning, because you haven't yet accumulated a lot of money.
And anyone who is planning to make a success of life should start planning their finances, including their estate, early on, he says.
The first R3.5 million in your estate may be free of estate duty when you die, but you don't need to have an estate of R3.5 million - or R7 million jointly if you are part of a couple - before it becomes necessary to do some estate planning.
Burger says it is difficult to change assets that have vested in your name - for example, property that has been registered in your name - into assets that vest in a trust or another person.
You should start with the end in mind, he says, and before you become a wealthy person know how to deal with your assets.
You should also be aware that you will probably have to pay for a professional estate plan.
The amount of work involved in a simple estate plan for a professional planner (excluding the time it takes support staff to, for example, type up an estate plan report) will be in the region of two-and-a-half to three hours before the planner begins to even give you any advice, Burger says.
You should expect to pay a fee-based financial planner between R2 500 and R10 000 for an estate plan, obviously depending on the nature and assets in the estate, he says.
It may be possible to get a will drawn up by a bank for free, in return for which the bank appoints itself as the executor of your estate and earns executor's fees when you die. But the preparation of this will is unlikely to include an estate plan or include any advice on how to structure your estate most efficiently, Burger says.
An estate plan that is done free is probably worth as much and might even cost your dependants more than proper planning would have cost, he says.
Who is Arno Burger?
Arno Burger grew up in the rural Free State town of Bultfontein and went to boarding school in Bloemfontein. After his compulsory military training and a stint working overseas, he started a career in the insurance industry with Momentum Life.
In 1992, he set himself up as an independent financial planner, opening an office in the Free State in Welkom. Soon afterwards, he expanded to Gauteng.
In 1993, he became involved with the Insurance Brokers' Council (IBC) on a regional and national level and was the elected chairperson of the Free State division from 1996 to 1998. He also served on the IBC's national management committee during this time.
In 1999, he opened a Pretoria office of his practice (now called Fidius). Burger is now based in Pretoria and Fidius has grown into a fee-based financial planning practice with two financial planners and five support staff.
Burger has attended several courses through different financial and educational institutions, including a course in estate administration through the University of South Africa, and he completed his Post-Graduate Diploma in Financial Planning through the University of the Free State in 2003 and became entitled to use the Certified Financial Planner (CFP) accreditation.
Burger's wife, Winnie, is a full-time partner in Fidius and a financial planner who is in the process of finalising her own postgraduate studies in financial planning.
The couple have two children, Charnay, 11, and Arno, 15. Burger says he is a family man and enjoys his profession, spending time with his family and cycling.