The importance of estate planning

Dr Eben Nel explains how proper estate planning ties in with the drafting of a valid and meaningful will.

AMANDA VISSER: Today we talk about estate planning and wills. We have all heard horror stories of friends and family members who have died without a last will and testament. We have also heard stories of people who have drafted their own wills, but in the process caused a lot of harm and hardship to those who have been left behind. A will is basically a detailed summary of a person’s financial affairs and what must happen to all the assets once the person is no longer there. We talk to Dr Eben Nel, national chairman of the Fiduciary Institute of Southern Africa, about how proper estate planning ties in with the drafting of a valid and meaningful will. Eben, maybe we could start off by explaining what is estate planning?

EBEN NEL: Amanda, every one of us has assets that we can collectively call our estate; usually there will be a financial plan and a succession plan, which just means that you have some wishes in terms of what must happen with your estate after death. That process of linking your financial position, your financial plan, to your succession plan, that we can call estate planning. So it will include the arrangement and the disposition of your estate in such a way that your wishes are clear and practical and it’s possible for the executor to fulfil them after your death.

Read: Why a DIY will is not a good idea

AMANDA VISSER: What are the consequences if you do not do this?

EBEN NEL: You will definitely still die and you will definitely still have an estate, and the executor will still have to deal with your estate in some way. Part of the estate plan is obviously your formalised will, so even if you die without a will or without a plan, the process will still be followed by the executor but he won’t have any indication of what you wanted and there wouldn’t have been any plan.

We all know the old adage that if you don’t plan then you’ll definitely fail.

Intestate succession will be applicable if there’s no will – and if you did not have a plan before you made the will, it is possible that there may be a cash shortfall in your estate. If you had the will without a plan, it means that some of your wishes may not be practical; the executor will not be able to actually execute some of your wishes.

As an example, if you said that somebody must receive a certain amount of money, what we call a legacy, and there’s not enough cash in the estate to do that, then maybe the executor will have to sell a property, a fixed property, to pay out that cash amount. This means that the person who would have received the fixed property won’t receive the fixed property any longer because a legacy, for instance, is stronger or stands first in the line before an heir.

So, there are different rules that the executor will have to apply and if no exercise was done beforehand to plan it properly then it may just mean that your wishes fail.

Seek professional assistance in estate planning

AMANDA VISSER: Can you give us a few practical examples of how you go about planning your estate? 

EBEN NEL: I’d say that the most important thing is to get somebody to assist with the process. It doesn’t mean that nobody can do it on their own, just like you might be able to service your car on your own, but you may not be able to do it as effectively as a professional.

My advice will always be that you go to someone who can assist you, and your estate plan should flow from your financial plan.

So, when planning for retirement or even after retirement, you’ll conduct financial planning with your financial planner to make sure that you have enough money to last your lifetime; to make sensible investments and so on. This is all good and well but what happens when you die or what happens when the first one of a couple dies, what will be the outcome for the survivor?

It is very important because sometimes people may be in a second or a third marriage, there may be different sets of children involved, some people may have maintenance claims against the deceased and so on. There may have been a previous marriage and there may be some consequences from that marriage as a maintenance liability and so on. All those aspects should be considered by the estate planner to advise the client on what the effect of that will be, the legal effect, and how that should be integrated into the estate plan.

Read: The emotional and financial cost of a poorly-drafted will

AMANDA VISSER: Eben, would you say that your financial planner and estate planner should be the same person?

EBEN NEL: Ideally it should be two different people, there are some financial planners who also do estate planning but in many firms you will have two different individuals. I always like to say that the focus of the financial planner is different; it’s to really make sure that you have enough money if you live too long, while the focus of the estate planner is to make sure that there is enough money if you die too early, and we don’t know which one will happen. So they both have a role to play.

It is possible that the same person can do both but, as I say, in most cases you’d have two different individuals because the estate plan is a far more legal exercise, while the financial plan is mainly a financial and economic exercise. However, in both cases tax planning plays a central role because whether you are alive or whether you have passed on, there will always be tax consequences.

The impact of marriage contracts on estate planning

AMANDA VISSER: We’ve all heard about couples being married in community of property and out of community of property, would you mind explaining to us the difference and the impact of that on estate planning?

EBEN NEL: The way that people are married is very important because when they die, the marriage comes to an end. People often think that is an important factor when they get divorced, but it is just as important when they die because you have the same consequences.

Married in community of property just means that there’s only one estate – a joint estate – so if one of the two partners passes on it means that that one estate is actually administered by the executor. So every asset that those two spouses have will be affected and will be administered in that process, although only half of the estate will inherit. That means half of everything; every car, couch, and fixed property.

When you are married out of community of property it simply means that there are two different estates. Each party has his or her own estate, just like they had it before their marriage. They will also have their different estates and their separate estates after their marriage. So if one dies it is only that estate of the deceased party that will be administered.

As an example, if spouses have a joint primary residence and they are married in community of property, and it’s registered in both names, it means that that property will form part of the estate but only half of that property will be transferred. So if they’re married in community of property and the will says that all assets go to the children and there are two children, it actually means that a quarter of that estate will go to each of the two children and the surviving spouse will be left with 50% of the house.

If they are married out of community of property and the house is only registered in the deceased spouse’s name, then obviously it will be transferred to his heirs. If it’s registered in the name of the surviving spouse, then it won’t be affected at all and won’t form part of the estate. Just to make it completely clear to understand, if they are married out of community of property and the house is registered in both names because that is also possible, then you will have a similar consequence to the situation where they were married in community of property.

AMANDA VISSER: What is the consequence for the surviving spouse when they sit with half a house?

EBEN NEL: Well, that is obviously very complicated. To take a simple example, if there is a combined estate, as an example, and the husband dies without a will, then intestate succession will take place. This means that his wife and children will collectively inherit, and there are certain rules, I won’t go into the detail, from the husband/father. So the wife will ultimately sit with half of the property plus a percentage of the other half, depending on how many children there are, and the result will be that they will be co-owners – the children will automatically become co-owners of that house percentage-wise.

They will literally be able to say, ‘but we also want to live in the house’ and will have to contribute partly to the costs and the maintenance and so on. So yes, it can become a very unfortunate situation if there’s no plan and if people don’t understand the consequences of their wills and their wishes.

The role of trusts in estate planning

AMANDA VISSER: Although the role of trusts has diminished over the years, can you explain the role of trusts in estate planning and eventually the purpose in a will?

EBEN NEL: I think the simple thing to understand about a trust is that it is separate – and I am generalising now – from the estate of the individual.

If you have an out of community of property situation then there are two estates, and if those parties collectively have a trust, let’s say an inter-vivos trust between living people, then that would form a separate estate. So any assets that have been placed in the trust would fall outside of the estates of the two parties.

There are different reasons why a trust may be important. In the case of a living trust, people usually form that to protect assets. If you have assets in a trust and you’re a business person and land in financial difficulties, and you may have signed surety for your company and so on, then your creditors will not be able to attach the assets that are in the trust because they’re separate from your personal assets and you do not automatically bind the trust when you stand surety, for instance. This is because, as trustee, those assets are not part of your personal estate.

The further purpose of a trust is that it can become part of your succession planning. If you have three children, for instance, and purchase a holiday home that you would like to remain in the family for a long time, maybe for two or three generations, then placing it in a trust from day one means it will not be affected by the death of either the father or the mother because it’s not their asset and there would be a smooth succession process.

When the last one of them dies, the children will remain the beneficiaries of the trust and after their death, even the third generation will remain the beneficiaries. So ultimately you don’t have to transfer the property each time somebody passes on. If there are three children it doesn’t have to be registered in all three of their names, it just remains in the trust. So it’s also a very good succession planning instrument.

The other type of trust is your testamentary trust; one that is formed in a will. There are various reasons why one would do that and that would be for assets to be inherited by minors, for instance, or to be protected for a period of time, say, for instance, a farm, you can put it in a trust and you can say my children are the beneficiaries of the trust but my wife will be an income beneficiary, so she will not get the capital of the farm but for the rest of her life she will get the benefits and the fruits of the farm. So a trust usually must form an integral part of your estate plan.

AMANDA VISSER: Eben, thank you very much for that insightful information. That was Dr Eben Nel, national chairman of the Fiduciary Institute of Southern Africa.

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