Key issues in estate planning
“If you knew you were to die tonight, would you know what the estate duty implications would be in your estate?” Pat Blamire asks.
“Do you know what capital gains tax your estate would pay?
“Would there be enough cash or liquidity in your estate to pay the different costs that would arise?
“Would your loved ones have enough money in cash to keep on going until your estate is wound up?
“Would your family receive what you had intended them to receive?”
Finding the answers to these questions is what estate planning is about, Blamire says.
Blamire, a financial planner with Charted Wealth Solutions in Johannesburg, was a finalist in the 2010 Financial Planner of the Year competition.
Estate planning involves the arrangement of your assets so that they may be moved – in the most efficient way possible – to the people whom you wish to inherit your assets. It also involves ensuring that no unnecessary taxes or estate duty are payable, she says.
In practice, what happens when you die is that all your assets are frozen. This includes your bank account. If you use your spouse’s bank account, this account will be frozen too, so each spouse should have his or her own bank account, Blamire says.
Although you may have appointed an executor in your will, that person will not automatically become the executor, Blamire says.
The Master of the High Court has to appoint the executor officially, and this can take anything from one week to three months, she says.
Once appointed, the executor takes control of the administration of your estate, settles any liabilities in your estate and distributes the remainder of your assets in terms of your will.
WITHOUT A WILL, THERE ISN’T A WAY
Estate planning begins with your will. The first question you must ask yourself is whether your loved ones will be able to find your original will after your death, Pat Blamire says. Searching for a will can delay the winding up of the estate.
The next thing you should consider is whether your will is up to date and reflects your current wishes on how you would like your assets to be distributed on your death, Blamire says.
Your will is a living document and should be reviewed whenever your circumstances change, she says.
Your will should be comprehensive but simple to understand, Blamire says.
Although your will does not have to be dated, dating it makes it easy to identify which is your most recent will, she says.
Make sure that your will is valid: it must be signed by two independent witnesses who do not stand to inherit from the will, Blamire says.
You should consider including special instructions in your will, such as stipulating whether you would like to be buried or cremated, she says.
You must name an executor in your will, and if your will establishes a testamentary trust, you should name the trustees of the trust, she says. Blamire says she suggests that you name as the executor your spouse or someone close to you whom you can trust.
Banks offer to draw up a will for you at no cost on the condition that they appoint themselves as the executor. In the long run, this free will may cost your heirs more, because the banks can charge an executor’s fee that is a percentage of the estate up to 3.5 percent plus VAT, as well as other fees, Blamire says.
Appointing your spouse as the executor does not mean that he or she has to wind up your estate: your spouse can appoint an agent to do so and negotiate the fee for that service, she says.
Blamire says she suggests individual wills – rather an joint will – for her married clients. The his and hers wills can be mirrors of each other.
The problem with a joint will is that when the surviving spouse dies it can take a long time to locate the original will at the Master’s office.
If the original joint will cannot be found, the surviving spouse will die intestate. The assets will be divided in terms of the Intestate Succession Act, and this may not be how you wanted your assets to be split, Blamire says.
If you have overseas assets, you may require a separate will for your offshore estate, she says. You should discuss this with the person who draws up your will.
ROLLING OVER THE ESTATE DUTY ABATEMENT
Each person’s estate is entitled to an exemption or abatement from estate duty on assets up to R3.5 million. Estate duty of 20 percent is charged on assets that exceed this amount, with the exception of any assets you leave to your spouse, Pat Blamire says.
Legislation was changed recently to allow the estate of the second-dying spouse to use any portion of the exemption that the estate of the first-dying spouse did not utilise, Blamire says. This means that if the first-dying spouse left all his or her assets to his or her spouse, and therefore did not use any portion of the R3.5-million exemption, the exemption will roll over to the surviving spouse, and his or her estate will enjoy an exemption of R7 million on his or her death.
Rolling over the exemption has its pros and cons, Blamire says. If the surviving spouse lives for 20 years, the executor of his or her estate will have to track down the liquidation and distribution account of the first-dying spouse and prove to the South African Revenue Service that the exemption was not used in his or her estate. If you do not have the liquidation and distribution account, it will be quite a headache for your executor to prove that the exemption was not used, Blamire says.
If you have a fairly large estate and you have set up a trust during your lifetime (an inter vivos trust), rather leave the exempt amount to your trust, she says.
Blamire says the exempt amount can be invested in the name of the trust, for the benefit of the surviving spouse, and grow within the trust and not in the hands of the surviving spouse. This can save you estate duty, as the following example shows:
Roger has an estate of R7 million. Roger’s estate will not pay any estate duty if he leaves all his assets to his wife, Sue.
If Sue dies 10 years later and her estate has grown to R9 million, her estate will pay duty on R2 million (R9 million less the combined abatement of R7 million). At 20 percent, the duty will be R400 000.
But if Roger leaves R3.5 million to a trust of which Sue is a beneficiary and the remaining R3.5 million to Sue, when she dies her estate will be worth only R4.5 million (half of R9 million), and it will therefore pay estate duty on R1 million (R4.5 million less the abatement of R3.5 million). At 20 percent, the estate duty will be R200 000.
WEIGH UP THE PROS AND CONS OF A TRUST
Trusts have many benefits, but you should probably not establish a trust if your only reason for doing so is to save estate duty, Pat Blamire says.
The Minister of Finance suggested in his Budget in February last year that estate duty may be done away with at some time in the future, she says.
In addition to the estate duty benefits of a trust, the advantages of a trust are:
* Assets can be protected against creditors and for the benefit of people who are unable to look after them themselves. Assets can also be protected for generations to come.
* A trust can protect the interests of beneficiaries such as minor children, a disabled child or a spouse with a degenerative disease, such as Alzheimer’s.
However, you need to be aware of the disadvantages of trusts. The main one is that if you set up a trust correctly you will no longer have control over your assets, Blamire says. The trustees collectively must decide how to manage the assets in the trust. If the original founder of the trust runs the trust as though the assets in it are his or her personal assets, the trust could be attacked, for example, by a former spouse, as a sham or an alter ego trust and it may have no legal effect, Blamire says.
The duties of the trustees are extremely onerous, she says. A higher responsibility is placed on them than on a director of a public company. Trustees are expected to act carefully, skilfully, diligently and independently, in the interests of the beneficiaries and in accordance with the trust deed. Trustees have a duty to avoid risk, invest productively and obtain expert advice, she says.
Trustees can be sued for not carrying out their duties, Blamire says.
The other disadvantage of a trust is that the administration can be time-consuming and costly, she says. Proper records must be kept, tax returns submitted and in some cases trusts must be audited.
You have to be careful when nominating the beneficiaries of an inter vivos trust, Blamire says. You should have some flexibility to change the beneficiaries, because, even though you may think you have had all the children you are going to have, things can change. For example, what would happen if your sibling was killed and you adopted his or her children?
Income tax within a trust is 40 percent, so any income earned within a trust should be distributed to the beneficiaries in the year in which it was earned so that it can be taxed in the hands of the beneficiaries instead. For example, if the trust earns R90 000 in interest for the year and there are three beneficiaries, they can each be paid R30 000. Each beneficiary can use the interest exemption of R22 800 (taxpayers under 65 years of age for the 2010/11 tax year), so they will each pay tax on only R7 200.
TRUSTEES WILL DECIDE WHO IS PAID RETIREMENT SAVINGS
Savings in your occupational retirement fund, retirement annuity fund and preservation fund, as well as any group life assurance, become payable on your death, but you cannot always expect the savings to be paid out as you have stipulated on a beneficiary nomination form, Pat Blamire says.
The beneficiary nomination form is only an indication to the trustees of the fund how you would like your retirement savings to be distributed, she says.
The trustees will determine how to distribute the savings according to section 37C of the Pension Funds Act. In terms of this section, the trustees have to trace your dependants, and then any persons who are financially dependent on you, say, an aged parent, and distribute your retirement savings equitably among them, Blamire says. Only if your dependants have sufficient funds, would the trustees consider anyone else you have nominated as a beneficiary.
You should bear in mind that a family member such as your daughter who lives rent-free with her boyfriend in a cottage in your garden may be able to prove dependency, Blamire says.
Your retirement fund savings can be paid out to your dependants either as an income or as a lump sum (after the income tax has been deducted).
If you have any specific wishes that you would like the trustees to take into account, record these on your beneficiary nomination form, Blamire says. For instance, if your daughter proves to be irresponsible with money, ask the trustees to allocate her a monthly income rather than pay her a lump sum, she says.
Your assets in a tax-incentivised retirement-savings fund do not attract estate duty in your estate, she adds.
YOU CAN CHOOSE BENEFICIARIES OF A LIVING ANNUITY
Living annuity investments fall outside of the Pension Funds Act, so you can nominate the beneficiaries whom you would like to inherit your living annuity investments, Pat Blamire says. These investments can be drawn either as an income or a lump sum (after tax).
Recent legislation stipulates that it is not possible for one beneficiary to draw an income and for another to take a lump sum: all the beneficiaries must make the same choice. Blamire says she believes this was not the intention of those who drafted the legislation, and it is being redrafted.
Living annuity assets do not attract estate duty in your estate, Blamire says.
MINOR CHILDREN CAN’T INHERIT FROM YOU DIRECTLY
If you want to leave any assets to your minor children, you should rather leave the assets to them in a trust so that the trustees can look after the assets until the children can do so themselves, Pat Blamire says. Children under the age of 18 cannot inherit cash from you directly, she says.
If you have not set up an inter vivos, or living, trust during your life, you can in your will stipulate that you want a testamentary trust to be established on your death, Blamire says.
Make sure that your will deals comprehensively with the establishment of the testamentary trust, she says.
Normally, a trust deed is about 10 pages long, but your will serves as the trust deed in the case of a testamentary trust, Blamire says.
Your will should spell out who the trustees will be, who the beneficiaries will be, the responsibility of the trustees and any other conditions, she says.
If you do not set up a trust for your minor children, your executor will be obliged to hand their cash inheritance to the Guardian’s Fund.
Money managed by the Guardian’s Fund is invested very conservatively, Blamire says.
Investing too conservatively can make a big difference, especially over the long term. Blamire says that R1 million invested at, for example, a return of four percent a year will grow to only R1.8 million after 15 years, whereas if it is invested at a return of eight percent a year, it will grow to R3.3 million.
BUY LIFE COVER TO PAY OFF LIABILITIES
If your estate will not have enough liquidity to pay off your liabilities, you will most probably have to take out life cover that will pay out when you die and cover these liabilities, Pat Blamire says.
If you have young children, you may require additional life cover, because, without your income, your surviving spouse will most probably struggle to raise your children, Blamire says.
Carefully review the beneficiaries of your life policies, she says. While a policy to support your surviving spouse and children should probably name your spouse as the beneficiary, a policy you take out to provide liquidity in your estate should most probably name your estate as the beneficiary, Blamire says.
Remember that life policies, with some exceptions – most notably ones that pay out to your spouse – are dutiable in your estate. This means you should take out more life cover than you will require to pay the liabilities in your estate, because the liabilities may include a higher amount of estate duty, Blamire says.
SPOUSES SHOULD KEEP THEIR ASSETS SEPARATE
Married couples should split their assets between them to ensure that the surviving spouse will not be left without any cash after the other spouse has died, Pat Blamire says.
If the spouse in whose name all the assets are registered dies first, the surviving spouse may have no cash assets on which to survive while the estate is wound up, she says.