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Freedom of testation: Understanding key concepts and principles

Estate planning is a complex area of expertise and it helps to understand key concepts and principles before developing one’s legacy.

Freedom of testation is one of the founding principles of the law of testate succession as it provides testators with the freedom to direct how their estate should be distributed upon death. The principle of freedom of testation is a liberal principle which ensures that effect must be given to the expressed wishes of the testator.

A Last Will and Testament is the primary mechanism through which a testator can express his wishes, although there are some limitations to his freedom. Estate planning is a complex area of expertise and it helps to understand key concepts and principles before developing one’s legacy:

Executor

The Executor is nominated by the testator in the Will. He is the person who is responsible for winding up the estate after the death of the testator. Upon the death of the testator, the nominated Executor is required to apply for a Letter of Executorship in order to be formally appointed. Winding up a deceased estate is a specialist area of estate planning and requires that the executor have a solid understanding of finances and law. An executor is entitled to charge up to 3.5% (excluding VAT) of the gross value of the deceased estate. In addition, he can charge 6% of income accrued and collected from the date of death.

Codicil

A codicil is essentially a schedule or annexure to an existing Will which is made to add to or change an existing Will. It is essential that the codicil complies with the same requirements as a valid Will. However, a codicil does not need to be signed by the same witnesses as the original Will. Adding too many codicils to a Will can cause confusion and create a danger that your Will may be misinterpreted. Rather than adding codicils, consider redrafting your Will so that all your wishes are contained in a single, well-drafted document.

Guardian’s Fund

The Guardian’s Fund is a fund created to hold and administer funds which are paid to the Master of the High Court by various persons such as minor children who are not capable of managing their own financial affairs. The purpose of the fund is to protect the assets of minors until they reach the age of maturity. Each Master operates its own Guardian’s Fund. If you die intestate or do not make provision for a testamentary trust in your Will, any assets due to your minor children will be housed and managed by the Guardian’s Fund.

Inter Vivos Trust

An Inter Vivos Trust, also referred to as a Living Trust, is created during the founder’s lifetime through the establishment of a trust deed which sets out who the founder, trustees and beneficiaries are. Through the creation of an Inter Vivos Trust, the founder essentially creates a separate legal entity in which assets can be housed, administered and dealt with in terms of the trust deeds.

Special Trust Type A

This type of trust is created solely for the benefit of a person with a mental or physical disability as defined by the Income Tax Act. The disability must prevent the person from earning enough money to care for themselves or render them incapable of managing their own financial affairs. A Special Trust Type A can either be a testamentary trust or an Inter Vivos Trust. This type of trust ceases to exist at the beginning of the year of assessment in which the last beneficiary dies. 

Special Trust Type B

This type of trust is also known as a Testamentary Trust and is set up in terms of a person’s Will. The purpose of this trust is to protect the assets bequeathed to the minor children and relatives of the deceased. A Testamentary Trust comes into being on the death of the testator and is managed by the trustees appointed in terms of the Will.

Heirs and legatees

Heirs and legatees are people who inherit from a deceased person. An heir is able to inherit in terms of both testate and intestate succession. A legatee is only able to inherit in terms of a valid Will. In other words, a legatee is not a recognised beneficiary in terms of the law of intestate succession and will need to be specifically named as a beneficiary in the Will of the deceased in order to inherit. For instance, if you would like to bequeath a lump sum amount to your domestic worker in your Will, she would be considered a legatee.

Bequests

A testator can make specific bequests to individuals or institutions in his Will which can include a specific item or a pre-determined amount of money. Where a testator bequeaths a cash legacy to a beneficiary, he needs to ensure that his estate has sufficient liquidity to accommodate the bequest. All bequests to a surviving spouse and certain public benefit organisations are exempt from estate duty. Bequeathing assets which are encumbered can complicate your estate plan, so be sure to seek advice before structuring your Will.

Per stirpes

Per stirpes, or by representation, is a legal stipulation which requires that if a beneficiary dies before the testator, the beneficiary’s share of the inheritance will pass to his heirs. Essentially it means that each branch of the family will receive an equal share of an estate. For example, a testator leaves his estate to his son and daughter in equal shares. However, his son passes away before him. When the testator dies, the son’s share of his estate will pass to the son’s children. 

Usufruct and bare dominium

A usufruct is created where a testator gives someone the right to the income or use of a specific asset, such as a house. For example, a husband may grant his wife usufruct over their home until she dies, although he may bequeath the asset to his daughter. The wife is known as the usufructuary and she has the rights and enjoyment of the property during her lifetime. The daughter is the holder of the bare dominium (right of ownership) while her mother is still alive. On her mother’s passing, full title of the property will vest with the daughter.

Fideicommissum

A fideicommissum is a provision in a Will where a person inherits an asset on the condition that it must pass to someone else at a future date or at a particular occurrence. It is designed to enable a person to retain assets, such as a farm, within the family for future generations, although there are statutory limitations on the length of time a fideicommissum can be used.

Estate Duty

Estate Duty is a tax on deceased estates which is levied in terms of the Estate Duty Act. In terms of current legislation, Estate Duty is charged at 20% on the dutiable amount of the estate exceeding R3.5 million and applies to both property and deemed property. A well-designed estate plan will aim to minimise your Estate Duty liabilities. 

Deemed property

Deemed property refers to assets that did not exist at the date of death, but which are included in the dutiable estate of the deceased. Deemed property includes the amounts recoverable from a life insurance policy on the life of the deceased and lump sum payments payable from the deceased’s retirement fund. Ensure that your estate plan includes all property, including deemed property, to ensure that you fully understand your tax liabilities and liquidity position in the event of your death.

Capital Gains Tax

Capital Gains Tax, which was implemented on October 1 2001, is triggered by the disposal of assets. A capital gain or loss is determined by calculating the difference between the proceeds i.e. the amount accruing to the seller and the base cost of the disposed asset. In respect of South African residents, the first R2 million of the capital gain on the disposal of a primary residence is excluded from CGT. Once the taxable capital gain has been calculated, it is included in taxable income and taxed at normal income tax rates. Certain assets in a deceased estate are excluded from CGT, such as assets for personal use, assets that accrue to the surviving spouse, assets from life insurance policies and assets bequeathed to approved public benefit organisations. Interests in retirement funds and the first R1.8 million of small business assets are also excluded from CGT. At death, CGT is activated through a deemed disposal whereby the deceased is deemed to have disposed of all his assets at the market value at the time of death. Your estate plan should include a breakdown of your CGT liabilities in the event of death and an assessment of your estate’s ability to meet these liabilities.

Maintenance of Surviving Spouses Act

The Maintenance of Surviving Spouse Act makes provision for a surviving spouse to claim against the estate of her deceased spouse in the event that she has not been provided for in his Will, and this is one of the few instances where freedom of the testator is limited. In terms of South African law, partners who are married create a legal bond and a duty of support between them. If the surviving spouse is unable to maintain herself financially, she can claim against the estate of the deceased for the provision of her maintenance in terms of this Act.

ADVISOR PROFILE

Eric Jordaan

Crue Invest (Pty) Ltd

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