Having a will is vital, but it is just one part of estate planning. You should also ensure that you have enough cash in your estate to meet your liabilities and pay estate duty, without compromising your dependants.
Estate planning is an essential part of financial planning. Your "estate" means everything you own (your assets and any assets deemed to be yours) and do not own (your liabilities). Estate planning is all about how you intend to dispose of your assets (after paying off your liabilities) when you die.
The more complex your finances, the more essential it is that you get expert advice.
These are the four main steps to estate planning.
Step 1: Your financial plan and your estate
The best place to start with estate planning is to establish how much you have or do not have. A proper financial needs analysis will identify and quantify:
- Your assets (current and future). Your assets are classified as property and as deemed property.
- Property includes corporeal assets, which include immovable property (such as your home) and movable property (such as your furniture); and incorporeal assets, such as shares and unit trusts.
- Deemed property includes proceeds of a life assurance policy and any lump sum from a retirement fund. (An annuity portion from a retirement fund is excluded from your estate).
- Your liabilities (current and future). This includes your debts and what you expect to pay out in future support of dependants.
- Your tax commitments at death.
- How to structure your estate to ensure that you pay the minimum amount in estate duty and other tax, while ensuring the maximum inheritance for your heirs.
- How much life assurance you need to meet all your liabilities and commitments at death.
Step 2: Drawing up a will (testament)
If you die without a will (dying intestate), your assets (less your liabilities) are divided among your relatives according to a legal formula.
You need to revise your will on an ongoing basis because your personal circumstances may change (for example, you may have a child); your financial circumstances may change; and tax legislation may change.
Most banks draw up and execute wills, or you can go to a lawyer or an accountant. You can expect to pay upwards of R250 to have a will drawn up. If you appoint your bank or lawyer as executor of your estate, they will also charge a fee of 3.5 percent of the value of the assets. Other management fees can be added, such as six percent of income collected.
In drawing up a will you need to consider a number of diverse issues, which include:
- The executor of your estate, who will execute the terms of your will.
- Your assets and liabilities.
- Naming your heirs. You cannot leave a spouse destitute by cutting him or her out of your will.
- Making provision for the possibility of you and your partner dying simultaneously, particularly if you have minor children or incapacitated dependants, who rely on you for an income. You need to name guardians and decide how your dependant's financial interests will be protected.
- An heir or a legatee. A legatee is a person/institution whom you name to receive particular benefits, such as your niece to whom you want to leave your piano. Your heirs receive what is left of your estate after the legatees have received their due. Legatees receive exactly what you leave them without any estate duty being deducted. The tax will be taken from the residue of your estate left to your heirs, reducing their share of your estate.
- Dividing and controlling your estate. You may want to guarantee income to one person while leaving the capital assets to someone else after the need for income is no longer there. For example, you may decide that a capital amount must be used to generate an income for the education of a child, but once the child is educated the capital may go towards funding the retirement of a spouse.
- Wills can be made unconditional or conditional. With an unconditional will your assets will pass directly into the ownership of your heirs on your death, after the legal formalities have been completed. However, you can make your will conditional with your heirs receiving assets subject to a number of conditions. These conditions may include:
- Time (for example when an heir reaches a certain age).
- A future event (for example, when an heir has acquired certain skills or qualifications).
- An obligation for the asset or income to be used for a certain purpose. For example, to pay all or part of an income of an asset to a surviving spouse or former spouse until the death of the recipient, when the capital will pass to a child.
- Succession planning. Business partnerships are dissolved on death, so you need to make plans for who will succeed you, whether the business should be sold or who will have the rights to income generated by the business.
Step 3: The liquidity of your estate
The liquidity of your estate simply means how much cash is available to settle liabilities (what you owe) and to meet commitments to dependants. Liquidity requirements include:
- An estate can take a year or even longer to be wrapped up. During this time you need to ensure your dependants have sufficient money.
- Ensuring that there does not have to be a fire sale of assets to raise money urgently to meet liabilities, reducing the value of the benefits your heirs could otherwise receive.
- The payment of outstanding debts such as a mortgage loan.
- The payment of estate duty and capital gains tax.
- The payment of funeral and other costs.
- The payment of fees to your executor and to the Master of the Supreme Court.
Liquidity can be generated from:
- Group life cover provided by a retirement fund. This money will go directly to dependants.
- The provision of a pension from a pension fund. In most cases, a pension will be provided to the spouse as well as to children. Most children are paid pensions until the age of 21 or 25 if the child continues to study.
- Provident funds. This will be a lump-sum payment to a beneficiary.
- Retirement annuity, which will be paid out to the beneficiary.
- Life assurance policies (both risk and investment policies) can be paid out at your death directly to your dependants, to pay off debt directly or into your estate, depending on where cash is required. You must name the beneficiaries on your policy documents. The proceeds are however subject to estate duty.
- If you have ceded a life assurance policy to a bank to cover debt, you must ensure that you give instructions to the bank and life assurer about what must happen if you die and part, but not all, of the policy is used to settle your debt. You can decide whether the residue must go to your estate or to another beneficiary.
- If you are retired or about to retire you must ensure that your annuity (pension) provides an income for dependants after your death. Your main options are:
- A joint and survivorship annuity, which will continue to pay a pension until the death of the surviving partner.
- A "capital preservation annuity". Part of the income paid by the annuity will go to pay your monthly pension and part will go to fund the life assurance policy.
- A living (linked) annuity. At death your dependants have a choice whether to take the residue as a lump sum, to purchase any other type of annuity, or to continue to receive the annuity.
Step 4: Taxation at death
Tax comes in two main forms at death. These are:
- Estate duty. This is a tax on your assets less your liabilities, with certain exemptions at death.
- Capital gains tax (CGT). This is a tax on any capital gain that you may make on an asset. Death is considered to be a CGT event. In other words, at your death all your assets are valued from the date of acquisition and again at the date of your death. Any gains are subject to tax, although there are certain exemptions. Liabilities are not taken into account for CGT purposes.
Not everything you own is subject to estate duty or CGT. There are exemptions and deductions:
- No estate duty or CGT is payable on any part of an estate left to a surviving partner. For tax purposes a partner is a spouse to whom you may be married by religious, civil or customary ceremony; or someone with whom you have a permanent relationship. This includes same gender relationships.
- The first R1.5 million of your net assets (what you own less what you owe) is exempt from estate duty.
- The first R50 000 of any capital gains in the year of your death are exempt from CGT as well as all other exemptions that normally pertain to CGT, such as the first R1 million of profit on your primary residence.
- An annuity (pension) which continues to be paid after your death. The annuity will be subject to income tax in the hands of the recipients.
- No CGT is payable on assurance policies. Named beneficiaries receive the benefits free of all tax in their hands, but the amount is included for estate duty purposes.
- Deductions from estate duty include: funeral expenses; the cost of administering and liquidating your estate, including the payment of fees to the executor and the Master of the Supreme Court; any liabilities, such as debts, your home loan, any accrual claim of a surviving spouse or guarantees that you may have given to secure someone else's debt that may be claimed against your estate.
Part 36:
Trusts in estate planning