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A will is only part of the solution

Bad estate planning can be very costly.

We have just come out of National Wills Week which is a great initiative aimed at creating awareness around the benefit of having a will (last will and testament). Having a will doesn’t necessarily solve all your estate problems and I thought, at this time of heightened awareness, to discuss a few other things you need to think about.

You should do your best to make your will simple. Your will should:

  • Be written in simple English;
  • Have simple devolvement; and
  • Have the ability to be executed simply.

There are two other notes around your will:

  1. Executor – you should select an executor that has experience and that understands the various assets in your estate. If assets like retirement assets, for instance, are dealt with incorrectly there could be adverse tax consequences.
  2. When you die your executor is left to sort out your affairs and this can take longer than necessary if you leave your executor unprepared. You should give your executor an itemised list of all the assets he/she has to deal with, including reference numbers, and, if applicable, the location. If you are a related party to a trust or company, you must also make the executor aware of any loan accounts to or from the trust/company as these could be either an asset or liability in your estate. Lastly, if you’re a shareholder in an unlisted company discuss this with the executor, introduce them to the accountants and let them know if there are things like buy-and-sell agreements in place.

Contractual assets

The premise of a will is such that it directs your executor, or executors, on how to distribute your estate. There are probably several investments in your portfolio that are contractual assets and these assets will be distributed according to the terms of the contract, irrelevant of what your will says. Some of the assets that are governed by contract are, inter alia:

  • Endowments;
  • Life cover;
  • Living annuities;
  • Retirement annuities; and
  • Preservation funds.

It is only in unconventional circumstances where a will may be considered in the distribution of the above list.

An interesting category in the above list of contractual assets is the pre-retirement assets. The trustees of the pre-retirement fund (retirement annuity, preservation fund, pension fund and provident fund) are bound by Section 37 of the Pension Funds Act to look for any dependents before paying the nominated beneficiaries. A dependent is legally first in line to receive pre-retirement assets. An example of this would be where someone has a child out of wedlock; whether that child was nominated as a beneficiary or not, they may have a legal right to some, or even perhaps all, of the retirement asset.

Contractual assets often have two very appealing characteristics:

  1. The assets can be distributed once the death certificate and letter of executorship have been issued. This means that the beneficiaries can receive the value of these assets within a few weeks of the deceased’s death. This must be considered in contrast to assets dealt with in the will which can often only be distributed once an estate is wound up (usually around 12-18 months), unless the executor has carefully examined the net position of the estate and is prepared, at their risk, to give the beneficiary an advance.
  2. There are no executor fees so long as the nominated beneficiary is someone other than the estate. Please do not confuse this benefit, as sometimes happens, with not having to pay estate duty which is still applicable. In fact, estate duty may have to be recovered from beneficiaries

Offshore assets

It’s not always possible to deal seamlessly with your offshore assets via your local will. Probate is the entire process of administering a deceased person’s estate and this process differs from jurisdiction to jurisdiction. Your foreign assets may require their own probate if you only have a South African will. Obtaining probate in the foreign jurisdiction can delay the administration process and be quite costly (a local will needs to be sealed, notarised and sent to an attorney/barrister offshore to comply with their formalities). Introducing foreign probate can add time delays and costs, this can be partially offset by having a specific foreign will to deal with those assets. If you do have a foreign will, you must double-check that your local will doesn’t revoke this or, said another way, your local will must specifically exclude the assets dealt with in the offshore will.

Another indirect consideration is that some assets held in certain foreign jurisdictions, most notably the UK and the US may be subject to inheritance tax (in the UK) and estate tax (in the US) under the law of situs (i.e. where an asset is treated as being situated or located for legal purposes). In the US this results in tax at up to 40% for asset bases over $60 000 and in the UK tax at 40% for asset bases over £325 000.

Foreign wrappers (endowments) can provide a neat solution for both probate and situs considerations – I’m not going into detail in this article, but your financial advisor should have the answers.

Liquidity

It can get expensive to die; estate duty, deemed capital gains tax on all your assets, legal costs, executor fees, and burial costs. Your estate plan needs to go beyond deciding who gets what and include making sure that your estate has the necessary liquidity to cover all the costs. A neat way to provide for this liquidity can be with a life policy, however, depending on your asset mix and worth, it may not be necessary.

In closing, National Wills Week has hopefully given many of you a reminder to take care of this often neglected, yet very important, aspect of your lives. A further hope is that my article has given you something to think about that’s a little more holistic than the will itself.

Good Luck!

ADVISOR PROFILE

Stephen Katzenellenbogen

NFB Private Wealth Management

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