Whose estate is it anyway?
An estate planning process involves the alignment of your estate planning instruments for your benefit during your lifetime and the benefit of your ultimate beneficiaries.
In essence, there are actually four estates that one has to deal with in the estate planning process:
- A client’s personal assets (these will be dealt with in their will)
- Trust assets (These are dealt with by the trustees of the trust in terms of the powers granted in the deed)
- Contractual arrangements such as Life assurance proceeds and Buy-and Sell agreements (to be paid out to a nominated
- beneficiary or to the surviving business partners)
- Retirement fund benefits. (These are regulated by the Pension Funds Act while you are a member of the fund. If you elect a
- living annuity after retirement you will be able to nominate a beneficiary for the living annuity proceeds).
In addition to having four “estates to consider”, life is not simple, and many things will happen to you along the way – both good and bad.” Estate planning has to take all of these events (and potential events) into account and be flexible enough to meet your changing needs.
These are some of the key questions planners should be asking their clients when doing their estate planning:
1. Do you have a strategic estate plan in place?
Do you have a plan in place that takes the “four estates” and your personal requirements into account? Does the plan meet the long-term wishes you hold for your estate? Is the plan flexible enough to allow you to change the structure should your circumstances change?
2. Do you have a signed and up-to-date will?
This is the pivotal point of a successful estate plan – your plan may collapse without it. A will must express your wishes, be valid, signed and up-to-date. It can only deal with your personal assets; it cannot deal with trust assets. If you’re married in community of property, remember that your will may only deal with your half share of a joint estate.
If you have assets offshore, you can have a foreign will in addition to a South African will, or you could have one will dealing with both your local and foreign assets. If you have a large or complicated estate offshore, it may be better to have a will in the foreign jurisdiction where planners are familiar with the legislation. But be careful when updating your local will that you don’t revoke the foreign one.
3. Have you used the R3.5m abatement to best effect?
Each estate is entitled to a deduction of R3 500 000. For spouses the unused portion of the R3.5m abatement amount will “roll over” to the surviving spouse’s estate if not used. The abatement can be used in the estate of the first-dying spouse to remove estate duty on growth assets from the second-dying spouse’s estate. The issue is to identify growth assets as opposed to a non-growth asset such as a loan account. Typically a share portfolio can be bequeathed to a trust to limit growth in the surviving spouse’s estate. On the other hand a loan account can be left to the surviving spouse as it gives them the opportunity to keep reducing the amount in this account, thereby saving on estate duty.
4. Is “my” family trust at risk?
Trustees are required to:
- give effect to the provisions of the trust deed
- perform their duties with care, skill and diligence which can be expected of a person who manages the affairs of another
- exercise their discretion with the necessary objectivity and independence.
Often in family trust situations these requirements are ignored. The control, ownership and benefits become so mixed up that there is no trust and the risk exists that the trust assets actually vest in the “planner/client” thereby doing away with most of the benefits of the trust as an instrument in your estate planning.
5. Am I using my family trust effectively?
If used effectively, a trust is an estate planning and a tax planning instrument that can save you money and protect your family when they need it most. Using it effectively could provide many benefits over and above estate duty savings. Despite its tremendous potential as an estate planning instrument many trusts exist in name only and it is not unusual to come across planners who have established a trust (sometimes at great cost) only to leave the deed in a filing cabinet.
6. Are my buy & sell agreements going to protect my family?
Research shows that 75% of buy & sell agreements don’t work to the benefit of the client. Typical problems include agreements not properly signed, agreements in conflict with a client’s will, or in-community of property marriages not taken into account.
7. Are my policy beneficiary nominations up to date?
It’s important to note that nominating a beneficiary can save on executor’s fees but won’t save on estate duty (as the policy still forms part of the estate).
8. Have I made sufficient provision for liquidity?
An estate plan should also provide for expenses incurred in winding up the estate, to prevent dependants having to sell off assets to meet these expenses. A life assurance policy is a reliable and convenient way to provide for liquidity within the estate.
9. How will my retirement fund benefits be dealt with?
Whilst you are still a member of a retirement fund, the fund is an asset in your estate and this has implications in the case of divorce. Once you’ve retired and converted the retirement fund savings into a living annuity, you enjoy protection in the case of divorce. In addition, you may nominate anyone as a beneficiary on a living annuity. The benefit of a retirement annuity (or an occupational retirement fund) is that they fall outside of your estate so neither the lump sum nor the annuity is subject to estate duty.
10. Will my family know what to do in the event of my death?
Make sure that you, your spouse and family build a relationship with a good financial adviser who will be able to walk a surviving spouse through the financial intricacies of the death of a family member. Also make sure that your family knows where to access a copy of your will.
All material subject to our Legal Disclaimers.