Estate planning is often perceived as planning for your death. However, much of estate planning involves events that occur during your lifetime and includes financial planning, selecting an appropriate marriage regime, tax and business planning, offshore investing and retirement planning. All of these can impact on your estate plan which should remain fluid and adaptable throughout your life.
The essence of estate planning is to ensure that the wealth you create through your lifetime is transferred to your beneficiaries so that they can receive maximum benefit. As such, an estate plan takes into account all the assets and liabilities of a person with the aim of preserving, growing and protecting those assets to ensure the most beneficial distribution of wealth at the time of death.
Through effective estate planning, you are able to appoint heirs and legatees, create liquidity in your estate and make financial provision for your loved ones. You can also use estate planning tools to ensure smooth business succession and account for offshore assets. With the right expertise, you can ensure that your estate plan is practical, legal and efficient and that costs are minimised. Important estate planning tools that can be employed to achieve your goals include:
Will and legacy documents
A Will is one of the most important tools in your estate plan. Freedom of testation allows you to document your wishes and leave detailed instructions as to how you would like your assets distributed in the event of your death. A well-drafted Will allows you to ensure efficient administration of your deceased estate, provide for your dependents, reduce Estate Duty liability and protect the assets intended for your minor children. Other written legacy documents that you can consider are a living will or advance healthcare directive, a digital will, documenting your funeral and burial wishes, and organ donation. In the absence of a valid Will, you are deemed to have died intestate and your assets will be distributed in terms of the laws of intestate succession. It is therefore not advisable to undertake a DIY Will and to rather seek expertise in this regard.
Bequests allow you to leave specific assets to a named person in your Will, bearing in mind that all bequests to a surviving spouse and certain public benefit organisations are exempt from Estate Duty. Where a testator bequeaths fixed property to his surviving spouse, no tax is payable as all bequests to spouses are exempt from Estate Duty and/or Capital Gains Tax. A testator should be cautious when making a bequest of an encumbered asset such as a fixed property which is bonded. The executor of the estate is required to settle the home loan from the reside of the estate before transferring the property into the beneficiary’s name, and this could impact adversely on the other heirs. In such an instance, the testator could consider taking out life insurance to settle the home loan in the event of his death. Impracticalities can arise where a testator bequeaths a fixed property to multiple heirs in equal shares. As the asset is not divisible, the heirs may need to reach an agreement on how to receive their portion and this can lead to complications. Where a testator makes a bequest to a minor child, he should consider setting up a testamentary trust in his Will to house these funds. In the absence of a testamentary trust, any assets bequeathed to a minor child will be housed in the Guardian’s Fund which is administered by the Master’s Office, which is not ideal. The wording of a bequest and its context in relation to your other assets and liabilities are key to ensuring that your intentions can be implemented.
A testator can also make use of Trusts as an effective estate planning tool, and the type of trust he uses will depend on his specific needs. For instance, a testator can set up an Inter Vivos Trust to house certain growth assets in order to reduce future Estate Duty liabilities. He can also use a Testamentary Trust – which only comes into effect on this death – to protect the assets of minor beneficiaries. If he has a beneficiary who is mentally or physically incapacitated, he may wish to set up a Special Trust in order to protect the financial interests of the disabled beneficiary. A clear understanding of how trusts are managed and controlled – and how they are taxed – is important before setting one up.
Through the donation of assets, a person can reduce the value of his estate which, in turn, could result in lower Estate Duty. Being subject to the Income Tax Act, donations are subject to Donations Tax at a flat rate of 20% on the value of the donation. However, some donations are exempt from Donations Tax, and these can be used effectively in estate planning. For example, donations between spouses and charitable donations are exempt. In addition, a person is permitted to donate a maximum of R100 000 to another person each year on a tax-free basis, and this mechanism can be used during his lifetime to decrease the value of this estate and reduce Estate Duty. By employing a strategic approach to the use of donations over your lifetime, you are able to reduce costs and maximise benefit to your heirs.
In general, life insurance is used to provide liquidity in the estate in the event of the testator’s death. The proceeds from domestic policies taken out on the life of the testator are considered deemed property and are subject to Estate Duty, regardless of whether there is a nominated beneficiary on the policy or not. Bear in mind that the proceeds of buy & sell and key person policies are not included for Estate Duty purposes. A testator can effectively use life insurance to provide for his dependents in the event of his death, settle a home loan or vehicle finance, pay for funeral expenses, cover the costs of winding up his estate, or to prevent the executor from having to realise an asset to cover liabilities in the estate. Before cancelling or reducing any existing life cover, ensure that you may not need to employ it as part of your estate plan.
Living annuities are another effective mechanism for transferring wealth and reducing estate costs. Retirement funds, including living annuities, do not form part of a deceased estate and therefore do not attract Estate Duty. If you have nominated beneficiaries on your living annuity, the capital will be transferred directly to your beneficiaries. If no beneficiary has been nominated, the proceeds will form part of the estate but will not be included in the Estate Duty calculations – although the Executor is entitled to include the value when calculating his fee. Another advantage of having a living annuity is that your beneficiaries will have almost immediate access to the capital value and the income from the fund. After your passing, your beneficiaries may elect to withdraw the full amount, make a partial withdrawal, or continue receiving the annuity income from the fund.