Can I afford to die?
By James Robinson
The Covid-19 pandemic has served as a reminder that death can come at any time, and although it is not a subject we like to think about, there are some important things one should put in place to protect those you will leave behind. Besides the emotional stress your death will bring to your loved ones, without proper planning they could be plagued by financial stresses as well.
An important consideration in estate planning is how to make sure that all the expenses associated with death can be paid for, and death can be a very expensive business with many unforeseen costs. The costs of a funeral, cremation and/or other services are just the beginning. Funeral cover is a popular way to fund these and the family might not have money available at that stage while the estate is not finalised. One can even pre-pay for a funeral or cremation if you are afraid that you might not have enough money to pay for it in the future.
After the funeral has taken place, your Estate must be processed and an Executor appointed to finalise all the administration. Your estate includes everything that you own like houses, cars, the cash in your accounts and even life cover could be a deemed asset in your estate. It also includes the debts you owe, such as the bond on a house, car financing, credit card debt and personal loans. The Executor takes over your role for the transactions on your assets like selling assets, transferring assets, closing accounts, settling debts and distributing the assets to your beneficiaries.
Estate expenses can be significant. Your retirement fund investments or a Living Annuity does not form part of your estate as long as beneficiaries are nominated, and will not attract Executor’s fees.
Estate duty in South Africa is currently 20% on the first R30 million, and 25% thereafter. You get an exemption on the first R3.5 million of your estate and if you are married, your total exemption is R7 million in total for both of you. With some careful planning, there are ways to reduce estate duty. For example, if you are married there is no estate duty on any assets that you leave to your spouse. You have to be married in terms of customary, civil or religious law to get this benefit.
Executor’s fees are legislated at a maximum 3.5% + VAT, but a lower fee can be negotiated with the executor, specifically on larger estates and it is wise to do this while still alive. If you choose a family member as an Executor and that person does not have experience in estates, the Master of the Court requires a professional to be appointed. Ask for quotes to see how much such a supplier would charge. If you are married In Community of Property, the executor’s fee is not paid on only the half of the estate that was deemed to be the deceased’s, it is charged on the whole estate. Even though you might not be liable for estate duty on your estate you still need to make provision for the Executor’s fee. On an estate of R2-million this alone will cost R80 500.
When you die, your estate has to pay Capital Gains Tax on all your assets, with certain exemptions.
If you owe the South African Revenue Service any income tax, they will be first in line to claim from the estate. There are also Master’s Fees, capped at R7 000 and the Executor can take a percentage from income earned in the estate while matters are being finalised. This can take months or years if there are disputes to be sorted out.
It is very important that there is enough liquidity in your estate to pay for all the expenses and liabilities, or your wishes for your family might not turn out as you hoped. Liquidity means that you should have accessible assets like cash that are available or that can be made available relatively easily to pay for the fees and taxes. If there are insufficient liquid assets, the executor might have to sell non-liquid assets which could have unfortunate consequences. For example, you might only own a house and a car and you want to leave both to your spouse so there is probably no estate duty. However, to pay off the bond, the car finance and the Executor’s fee requires liquidity. If your spouse can’t apply for a bond in their own name to continue with the bond, and there is no savings to pay the executor’s fee it is possible that the house has to be sold, potentially at a lower amount than if there were more time available to find a buyer, to access cash to pay the estate. This could leave your dependants without a place to stay.
The easiest way to provide liquidity would be to take out a life policy if you do not have sufficient cash. Such a policy can also pay outstanding debts so that your partner doesn’t have to worry about getting a new bond. A life policy can also allow for a lump sum to provide income for your spouse and children. It is possible to reduce the cover in the future if your debt situation changes and as your children reach independence.
To make sure you are getting the best solutions in the event of your death, you should draft a will so that your wishes can be executed correctly. This can also reduce costs if done properly.
Make sure your documents are in order and that someone knows where your will is. If you don’t have a valid will you are deemed to have died intestate, which will divide your assets among dependants in terms of the Intestate Succession Act. This might not be the way you wanted your estate to be distributed and can be a lengthy and costly affair.
Make sure that you have made use of the correct investments, structures and options available for your investments – your estate could take many months to wind up and during that time your beneficiaries will not have access to the assets that fall within the estate. This could include making use of retirement funds that do not form part of your estate. It can also be setting up endowments that allow you to nominate beneficiaries so there is no executor’s fee on this and it gives you other tax benefits during the life of the product. You might want to set up a Trust while you are alive or at death that could reduce estate duty as well as ensuring your beneficiaries are looked after. This is particularly important for minor children or for those with special needs. Trusts do not suit everyone so get advice on this before setting it up.
James Robinson is a senior financial adviser at Alexander Forbes