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The many functions of an estate plan

Estate planning to a large extent involves the optimal structuring and managing of your assets while you are still alive.

A person’s estate is made up of all the assets and liabilities they’ve accumulated during their lifetime and, although estate planning is often perceived as something performed in preparation for death, the reality is estate planning to a large extent involves the optimal structuring and managing of your assets while you are still alive.

As a result, it is important not to perceive estate planning as final stage financial planning designed to secure a financial legacy for your loved ones, but rather as a continuous process of managing one’s assets and liabilities throughout your lifetime to ensure that your estate is optimally designed to achieve both your lifetime goals and your objectives following your death. Being multi-disciplinary by nature, your estate plan can be used to achieve many goals:

Determining estate liquidity

Liquidity in your estate is key to ensuring that your estate costs and liabilities can be provided for without compromising the financial inheritance intended for your loved ones. In preparing liquidity calculations, you will need to take into consideration the potential tax, capital gains and estate duty liabilities in your estate, as well as any debt owing – keeping in mind that when it comes to estate administration, Sars and your creditors will be paid first, following which the remaining balance in your estate, if any, will be distributed amongst your heirs. This means that, if there is not enough liquid cash available in your estate to settle with Sars and your creditors, your executor may need to realise assets – such as your primary residence, vehicles, holiday home, or other valuable assets – in order to pay off the estate’s debts. This, in turn, can severely compromise the financial security of your spouse and/or children, who may well be left destitute as a result of inadequate estate planning.

What to consider: Life cover is an excellent mechanism for creating liquidity in your estate and for avoiding the forced sale of assets intended for your loved ones. It is, however, important to ensure that your life cover is appropriately structured to achieve the goal of creating liquidity. Where you nominate your estate as a beneficiary to your life policy, the proceeds will be paid directly into your deceased estate in the event of death and, as such, can be used to settle debt. Remember, however, that the proceeds of domestic life policies are considered deemed property in your estate and will be taken into account for estate duty purposes, so this should be factored into the calculation.

Ensuring beneficiary nomination

Rather than being a once-off task, beneficiary nomination is something that should be reviewed and updated as your personal and financial circumstances change through your lifetime. Further, understanding how beneficiary nomination works in respect of each type of policy or investment is important to ensure that your objectives are met.

For instance, while your children are minors and legally not capable of inheriting, you may use a testamentary trust structure as the beneficiary for your life cover; whereas as your children reach the age of majority, you may want to name them personally as the beneficiaries to this cover to ensure that the proceeds are paid to them directly.

Further, if your intention is for the proceeds of your retirement funds is to provide for your loved one’s financial security, it is important to understand the limitations that Section 37C of the Pension Funds Act brings to the process. Unlike beneficiary nomination on life policies, the distribution of retirement funds benefits (being pension, provident, preservation, and retirement annuity funds) lies ultimately with the fund trustees whose job it is to identify all your financial dependants and to allocate the benefits accordingly – and their determination may not be in line with your wishes.

What to consider: Make a concerted effort to review the beneficiary nomination on your policies and investments on at least an annual basis, and upon any major life event such as the birth of a child, a death in the family, marriage, or divorce.

Drafting your legacy documents

Naturally, an important part of estate planning is to ensure that your legacy documents are appropriately drafted and valid and that they are fully aligned with how you wish your estate to be distributed in the event of death. Along with a well-drafted will, the collation of an estate planning file can be invaluable to your loved ones and to expedite the process of winding up your estate. Essential documents to include your estate planning file include obvious ones such as your birth certificate, marriage certificate, antenuptial contract, divorce certificate, maintenance orders, title deeds, trust deeds and share certificates. Other information that can be kept close at hand includes gun licences, codes for your safe, loan agreements, digital passwords and log on credentials, and alarm codes.

What to consider: A living will can be a valuable document for your loved ones should tragedy strike. In this document, you can provide much-needed guidance to your family and medical doctor regarding end-of-life medical care and treatment – something that can provide great comfort to your loved ones who may be faced with tough medical decisions. Through a living will, you can request that medical treatment that would prolong your life be withheld in circumstances where you are in a permanent, vegetative status, irreversibly unconscious, or where there is no hope of recovery.

Protecting the inheritance of minors

If you have minor children, structuring your estate to ensure that they are adequately provided for in the event of your passing will be imperative. Remember, children under the age of 18 may not inherit lump-sum payouts or other assets directly as they are deemed not to have the legal capacity to manage such assets. Thus, if you intend to nominate a minor child to a life insurance policy or bequeathing immovable property to them, it is important to understand the estate planning mechanisms available to ensure that your objectives are achieved. This could include the formation of a testamentary trust in terms of your will with your minor child as the named beneficiary to the trust. In the event of your death, any assets intended for your minor children can be left to the trust which, in turn, will manage the trust assets until your child reaches the age of majority.

What to consider: If you have a minor child, your will should also make provision for a legal guardian for your child in the event of your death. While your nominated guardian can also be a trustee of the testamentary trust, it is sometimes preferable to keep the roles separate for the sake of maintaining checks and balances.

Ensuring efficient estate administration

Effective estate planning allows one to put mechanisms in place in advance to ensure that in the event of your death the winding-up processes can be expedited and unnecessary delays can be avoided. Simple steps such as ensuring the validity of your will, communicating the location of your original will, appointing a professional executor, and keeping a file of all your estate planning documents, can be hugely beneficial when it comes to streamlining the estate administration process.

For instance, if you no longer have a copy of your marriage certificate, your executor will need to apply for a copy at the Department of Home Affairs which, in turn, will delay the administration process.

What to consider: Executorship is a highly specialised function that requires expertise in finance, deceased estates, trusts and accounting. As a result, think carefully before appointing a family member or close friend as executor. Inexperience and/or lack of understanding with regard to the estate administration process can cause unnecessary delays. Also, remember that family relationships and dynamics change over time, and it may be preferable to appoint a fiduciary expert to this role.

Reducing tax liabilities

While it is not possible to avoid paying tax, proactive estate planning gives you the opportunity to structure your estate so as to reduce the tax obligations of your estate in the event of death. Estate duty, which is essentially tax paid on the transference of wealth from your deceased estate to your beneficiaries is levied at 20% of the dutiable amount of an estate up to R30 million, and at 25% on the dutiable amount exceeding R30 million. Very simplistically, the dutiable value of your deceased estate will be calculated by adding the value of your property, deducting any allowable expenses, and then deducting the Section 4A rebate, keeping in mind that as a South African resident you will be taxed on your worldwide assets.

There are, however, a number of mechanisms that you can use to reduce the estate duty liability in your estate so as to maximise the inheritance of your loved ones. Compulsory retirement funds, including pension, provident, preservation and retirement annuity funds, are not considered property in your deceased estate and these benefits will not be subject to estate duty.

Living annuities are very useful estate planning tools because they also fall outside your estate and are not estate dutiable, while domestic life policies can also be used effectively to provide financially for your loved ones while ensuring that no estate duty is payable on the proceeds. Trusts, which are dealt with in the paragraph below, are also effective in housing growth assets and reducing estate duty liabilities in one’s deceased estate.

What to consider: When using living annuities and domestic life policies to reduce your estate duty liability, it is important to correctly nominate your beneficiaries.

Structuring growth assets appropriately

In terms of the Income Tax Act, death is considered a capital gains event and the deceased person is deemed to have disposed of their assets for an amount equal to the market value of the assets at the date of death. While the Act provides for a once-off exclusion of R300 000 in the year of death, any amount thereafter will have an inclusion rate of 40% subject to tax as per the deceased’s marginal tax rate. To avoid unnecessary CGT being charged in the event of death, an estate plan can help structure growth assets, such as property or shares, to reduce the tax liabilities in your deceased estate.

An effective mechanism for housing growth assets, particularly those intended for future generations, is an inter vivos trust during one’s lifetime. As the trust founder, you would need to either donate or sell the asset to the trust in the form of a loan account following which you would relinquish control of the asset which, going forward, would be managed by the trustees on behalf of the nominated beneficiaries. By transferring a growth asset – such as a holiday home – to a living trust, all growth on the property will remain in the trust and only the loan account to the seller will be repayable on death thereby reducing estate duty.

What to consider: As a trust founder, it is important to fully understand the implications of transferring an asset into a trust structure. Once the asset is transferred, you are no longer the owner of that asset, and your trustees are responsible for taking full control of the asset and administering it in accordance with the trust deed.

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