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The A-Z of estate planning

A look at the wide range of terms that are regularly used in this specialist field of financial planning.

Estate planning is complex and is governed by a number of pieces of legislation which need to be read and understood together. In this article, we explore a wide range of terms that are regularly used in this specialist field of financial planning:

Adiation

Where beneficiaries to a will accept the benefits of the estate of the testator, this is known as adiation. Unless otherwise indicated, it is accepted that a beneficiary will accept a benefit bequeathed to him in a will and, as such, there is no formal adiation process. However, where a benefit bequeathed to a beneficiary comes with an obligation, the beneficiary will be required to accept the benefit in writing.

Bequests

Where a testator makes a special bequest in his will to leave a specific asset to a beneficiary, that beneficiary is known as a legatee. A legatee does not need to be a member of the testator’s family, and could be anyone that he chooses to make a bequest to. After the executor has settled any debt and paid all estate administration costs, the legatees will then receive any legacies bequeathed to them in terms of the will.

Bewind Trust

A bewind trust, or vested trust, is a trust where the founder transfers ownership of the trust assets to the beneficiaries, but where the trustees retain administration and control of the trust assets. In this type of trust, while the beneficiaries own the assets, the trustees are responsible for managing the assets for the benefit of the beneficiaries and they do not have discretion in terms of the trust instrument, making it essential that the income and capital beneficiaries are clearly set out in the trust instrument.

Child’s share

If a person dies without a valid will and has children, then the child’s share calculation is used when distributing the deceased’s estate. By way of example, if the deceased leaves behind a spouse and three children, the child’s share will be calculated by adding up the value of the deceased’s estate and dividing it by the four (i.e. the spouse plus 3 children). The surviving spouse will receive a child’s share or R250 000, whichever is the greater, and thereafter each child will receive an equal share of the balance in the deceased estate.

Codicil

Simply put, a codicil is an annexure to an existing will, and can be used by the testator to add to or change an existing will. It is important that a codicil complies with the same requirements as a valid will, although keep in mind that it does not need to be signed by the same people who witnessed the original will. Care should be taken when drafting a codicil to ensure that the wording does not contradict or confuse the wording of the original will.

Deceased estate

A deceased estate comes into existence when a person dies leaving property or a will. Upon registration of a person’s death, anyone who has control or possession of any property of the deceased, or who is in possession of that person’s will, can report the death by completing a death notice at the Master’s Office.

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.

Donations Tax

Donations are regularly used as a means of reducing estate duty and are regulated by the Income Tax Act. For individuals, donations are subject to donations tax of 20% on the first R30 million of donations made in a tax year; thereafter, donations in excess of R30 million are taxed at 25%, with an annual exemption of R100 000. Where a person has a sizeable estate, he may use his annual exemption of R100 000 to reduce the value of his estate during his lifetime so as to minimise estate duty.

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 up to R30 million, and 25% after R30 000, and applies to both property and deemed property. A well-designed estate plan will aim to minimise your estate duty liabilities.

Executor

The executor is the person responsible for administering the deceased estate until it is wound up. An executor can be nominated in a will and, in the event of the testator’s death, the nominated executor will need to apply to the Master’s Office for Letters of Executorship which will confirm his appointment. Where a person dies without a will, the Master will appoint an executor dative to administer the deceased estate.

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.

Guardian’s Fund

The Guardian’s Fund is responsible for receiving and managing money on behalf of those who are legally incapable or who do not have the capacity to manage their own affairs. This includes minors, unborn heirs, and missing or absent persons. Funds held in the Guardian’s Fund are invested with the Public Investment Commission.

Habitatio

Habitatio is a type of personal servitude in favour of a particular individual who then has the right to use and enjoy another’s property. Habitatio, or residency, grants a person and his family the right to live in someone else’s house without changing the essential qualities of the property. Habitatio allows the servitude holder the right to lease the property. Habitatio ends either at the expiration of a fixed period of time or on the death of the holder.

Heir

An heir is able to inherit from a person via testate or intestate succession, whereas a legatee is only able to inherit in terms of a valid will. In other words, it is not possible for a legatee to exist where the deceased died intestate. After the estate debts are paid, the executor must pay the legatee first. An heir is able to inherit the entire inheritance, a proportion of it or a particular art of it. On the other hand, a legatee is not a recognised heir in terms of intestate succession. For instance, if you may make a special bequest in your will to leave money to your best friend, your best friend will be a legatee of your will.

Inter vivos Trust

An inter vivos trust is a trust that is set up during the lifetime of the individual and is often used to house assets for tax and estate planning purposes, allowing assets in the trust to grow without causing higher estate duty for the person’s estate. Such trusts may operate indefinitely, even after the death of the person setting up the trust. An inter vivos trust is created by a trust deed that sets out the duties and responsibilities of the trustees, how the assets are to be managed, who the beneficiaries are, and what the intention of the trust is. Inter vivos trusts can be effective estate planning tools to ensure succession and reduce estate costs.

Intestate succession

If you die without a will, or if your will is found to be invalid, you will effectively die intestate. If this happens, your estate will devolve on your heirs in a strict order of succession as set out in the Intestate Succession Act, 1987, and your estate will be divided amongst your surviving spouse, children, parents and siblings according to a pre-determined order. If you die with a valid will, but your will fails to deal with the residue of your estate, it is possible to die partly intestate, and the residue of your estate will be distributed according to the law of intestacy.

Joint estate

Where a couple is married in community of property, there is only one, joint estate. On the death of the first-dying spouse, the entire joint estate will be wound up and the surviving spouse will have a claim to 50% of the joint estate.

Key person assurance

Key person insurance is typically a policy taken out on the life of a key person in a company in order to minimise risk to the business if that person died prematurely or became disabled. While, generally speaking, the proceeds of a domestic life policy are considered deemed property in a deceased estate, the proceeds of a key person policy may be exempt from estate duty if correctly structured. To qualify for such exemption, the company who owns the policy must not be a family company in relation to the life assured, must pay the premiums, and must be the nominated beneficiary on the policy.

Legatee

Beneficiaries are people who inherit from a deceased person and generally include heirs and legatees. An heir is able to inherit from a person via testate or intestate succession, whereas a legatee is only able to inherit in terms of a valid will. In other words, it is not possible for a legatee to exist where the deceased died intestate. After the estate debts are paid, the executor must pay the legatee first. An heir is able to inherit the entire inheritance, a proportion of it or a particular part of it. On the other hand, a legatee is not a recognised heir in terms of intestate succession. For instance, if you may make a special bequest in your will to leave money to your best friend, your best friend will be a legatee of your will.

Minor child

In terms of South African law, a child under the age of 18 may not inherit lump sum payouts nor any other assets directly, because they are deemed not to have the legal capacity or ability to manage such assets.

Nomination

Beneficiary nomination plays a critical role in your estate planning to ensure that your assets are distributed in accordance with your wishes. In respect of life policies, business and key person policies, endowments and living annuities, you are able to nominate anyone as beneficiary to your policy. On the other hand, beneficiary nomination on retirement funds – including pension, provident, preservation and retirement annuity funds – is governed by Section 37C of the Pension Funds Act. This means that, while your nomination may be taken into account by the fund trustees, the trustees are ultimately responsible for identifying your financial dependants and for distributing the funds in accordance with their needs.

Office of the Master

The Master of the High Court is responsible for providing specialised services in respect of supervision, custodianship, arbitration and information regarding deceased and insolvent estates and trusts, serving estate practitioners, beneficiaries of estates and trusts, minors, and mentally challenged persons for the purpose of safeguarding those beneficiaries’ financial and proprietary rights.

Per stirpes

If you have a will, it is likely that the Latin term per stirpes appears in your will. Per stirpes is a legal stipulation which requires that if one of your beneficiaries dies before you, her share of the inheritance will pass to her children. For example, your will makes provision for your son and daughter to inherit your estate in equal shares. If your son dies before you, your son’s share of your estate will pass on to his children per stirpes.

Section 4(q) deductions

In terms of section 4(q) of the Estate Duty Act, the value of all property that accrues to the surviving spouse – including the proceeds of a domestic life policy where the spouse is the named beneficiary – is deductible from the gross estate of the deceased and is therefore not estate dutiable. Where a domestic life policy is registered under an ante-nuptial or post-nuptial contract where the spouse and/or child are the nominated beneficiaries, the proceeds of such a policy do not form part of the deceased’s dutiable estate.

Repudiation

Any person nominated to receive an inheritance, either through intestate or testate succession, may choose to renounce that inheritance in terms of Section 2C(1) and (2) of the wills Act 7 of 1953 or section 1(6) and (7) of the Intestate Succession Act 81 of 1987. The consequences of repudiation of an inheritance and what will happen to the repudiated benefits will depend on the terms of the will, if there is one.

Residue

Your estate’s residue is everything that is left in your estate after all debts and administration costs have been paid, and after all legacies or special bequests have been distributed. It is always important to ensure that your will has a clause that deals with the residue of your estate to ensure that you do not pass away partially intestate.

Spouse

When it comes to estate planning and for the purposes of calculating estate duty, a ‘spouse’ includes any person in a marriage or customary union, unions recognised as marriages under tenets of religion, and same-sex or heterosexual unions which the Commissioner is satisfied are intended to be permanent.

Testamentary trust

A testamentary trust is a special trust that is set up in terms of the testator’s will and only comes into existence upon the death of the testator. In terms of our law, minor beneficiaries are not able to inherit and therefore testamentary trusts are excellent vehicles to house assets intended for minor children or beneficiaries. Trustees of a testamentary trust are bound to manage the trusts in the best interest of its beneficiary until he/she reaches the stipulated age. Once the beneficiary reaches a pre-determined age, the testamentary trust is usually terminated.

Usufruct

A usufruct, which is also a personal servitude, 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 son. The wife is known as the usufructuary and she has the rights and enjoyment of the property during her lifetime. The son is the holder of the bare dominium (right of ownership) while his mother is still alive. On his mother’s passing, full title of the property will vest with the son.

Usus

Also a form of personal servitude, a usus is similar to a usufruct except that the holder’s rights are more restricted. Where a person holds usus over immovable property, he and his family may occupy the property and may use the fruits of the property. They may not, however, sell the fruits or enter into a lease in respect of the property.

Vested trust

Depending on the intention of the trust funder, a trust can be set up as either a vesting or a discretionary trust. In a vesting trust, the benefits of the beneficiaries are clearly set up in terms of the trust deed. On the other hand, in a discretionary trust, the trustees are given discretion to make certain decisions regarding the amount and timing of distributions paid to beneficiaries.

Witness

Anyone over the age of 14 and who is of sound mind is able to witness a will. However, it is important that a witness is not someone who stand to benefit from your will. For a will to be valid, it must be signed by the testator in the presence of two witnesses who must, in turn, attest to the testator’s signature. It is not necessary that the witnesses understand the terms of the will. It is only necessary that they know that they are witnessing a will.

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Craig Torr

Crue Invest (Pty) Ltd

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