Estate planning is not the preserve of the very rich

Don’t underestimate the power of financial advice when planning your estate.

NOMPU SIZIBA: Estate planning is critical for the orderly passing on of one’s wealth from one generation to the next. Within that, the will serves as a critical instrument which articulates the wishes of the deceased. Given the complexity of this area of law, having the assistance of professionals to guide one through the process is essential, and apparently, it’s not just in the preserve of the rich.

Well, to discuss some of the issues I’m joined on the line by Albert Coetzee, co-head of sales at the Ninety One investment platform. Thanks very much for joining us, Albert. Now, what are some of the issues around financial planning in relation to death, which has become even more topical with the pandemic?

ALBERT COETZEE: Hello Nompu and thank you for the opportunity. I think in death in general, when a client has passed away, look at the knowledge of the spouse inheriting from the husband, for example. The liquidity, I think taking Covid into account at the moment, is that at the offices, for example the Master’s office, everything is slower because of the increase in deaths, and also because of the various other pressure these offices have to face.

So, for me one of the most important points currently is to make sure that there’s liquidity on death costs, Covid or not. I think on death in general, cost is important, and cost can be divided into costs like estate duty, capital gains tax, but also for example executor’s fees. If I think quickly, those are immediate sort of like things to look at when an investor has passed away.

NOMPU SIZIBA: So, we see a trend where parents are now living longer, and in some instances their children are more financially dependent on them for a longer period, because of the cost of living and so forth. Maybe they’ll be in university for a long time and so on. How should people structure their estates in that regard?

ALBERT COETZEE: I think a very good point, Nompu. People need to be – I’m not saying they’re not – but I think people need to be almost more aware that when the father or the mother passes away, first of all they need to look to see if they can get independent financial advice at an early stage and not leave it too late. And also, to see wherever they can structure the investments in such a way to minimise costs and, for example, taxes, because there are structures out there, there are products out there which we recently touched on at the Ninety One investment platform, master classes to make advisors, when they deal with clients, aware of certain structures for products, for example, where they can limit costs and taxes.

Also, again back to my initial point, liquidity. But I think also very important are education and communication. If you look at international research, for example, quite a big percentage of client advisors today are not the advisor of the beneficiary. So various components, communication from the investor to the spouse, to the children, and also communication and education between the advisor and the client, and the advisor and the beneficiary – to keep that link, because I think when a beneficiary inherits from the parents, apart from inheriting investments or wealth, the beneficiary also inherits a responsibility to look after that investment also during his or her lifetime, but also to preserve it for the benefit of their children.

NOMPU SIZIBA: It’s obviously important, as you’ve mentioned, to have the expertise of a professional to assist in estate planning. What are the costs involved? Is this really just a service that’s in the preserve of just the rich, or can ordinary folk afford it?

ALBERT COETZEE: Ordinary folk can afford it. I would say any person in my view. Sometimes you find, when I speak to any clients, any client is almost excited by how the investment or instrument is performing and is not looking at the estate ‘stuff’ or the costs around the time of death. If you look, for example, sometimes that investment can perform well but, if it’s not structured correctly, all those costs on death can almost negate everything, all the performances that he or she had achieved in the investment.

So, costs, for example, are first of all, the advisors. I would recommend the client, the spouse and, as I mentioned earlier, the children, need an independent financial advisor to assist and educate the family grouping. And at the same time, the advisor needs to help and assist structure that investment, to try to negate or decrease or lessen the cost and the taxes on death.

But again, especially during Covid – and that for me personally was quite an eye-opener – you can look at cost, you can look at the advisor, you can look at all sort of taxes which you save on death. Do not forget liquidity on death, because without liquidity you can leave the spouse or the children destitute, especially dependent on you for liquidity during your lifetime.

NOMPU SIZIBA: You touched on an estate being passed from one generation to another, and the responsibility of that new generation to hold on to that wealth properly for the next one, their children. What are some of the challenges when it comes to inter-generational financial planning?

ALBERT COETZEE: A very good question again. Nompu, if you look at some research, the sort of international research which we have seen, you find sometimes that that’s maybe I wouldn’t say bordering on arrogant, but I find sometimes what is important to the beneficiary when they inherit is, according to some international research, is performance, it is technology, is my parents’ financial advisor in the same life cycle as mine, for example. Don’t underestimate the value advisors can add. So, I think sometimes when the beneficiary inherits, they look at these certain components, which may be right or wrong – I can’t say they are wrong –but do not underestimate the other types of value regarding the structuring of the investment which the advisor has done for the parents, which can carry over to the beneficiary. In many cases you could look at some of the Ninety-One products. The beneficiary can inherit a 100% liquid investment, matured investment, a well-priced investment.

And also, because there were beneficiaries nominated, for example, on the forms or the application forms, and it means it didn’t go via the will, didn’t have to pay executor’s fees, didn’t get the Master involved. So, the beneficiaries inherited [it] very well-priced, from a cost point of view, on this. But my question always is, is the beneficiary aware of it?

NOMPU SIZIBA: Yes. And tell us about where trusts come into it, because I think to a certain extent you’ve described them.

ALBERT COETZEE: Trust is a good point. The trust is sometimes topical because, say, during my lifetime how do I get money from my own name into a trust? You can loan it, and there’s sort of this new section, Section 7C, regarding the interest and sort of the loan agreement between the trust and me. Or I can donate it, meaning, like I pay donations tax. But interestingly, if for example I have two children and I die, and maybe feel my children are not financially educated, or not astute enough, or vulnerable, my spouse is vulnerable, don’t underestimate a trust can inherit from me. Sometimes people may think that only my spouse can inherit from me, or my children can inherit from me – but a trust can also inherit from you.

I think the big benefits of a trust inheriting from me is that there is no loan account. There’s nothing owed between me and the trust, seeing that the trust inherited it from me. If, for example, thinking aloud, if my spouse, for example has dementia, I would be very worried, if I died, who would look after my spouse. Now if the trust or testamentary trust, for example, will inherit, the trustor the trustees can, for example, look after my spouse. So, I think, especially on death, a trust in general is topical, but I think especially on death a trust can also inherit from an investor.

NOMPU SIZIBA: Right. And then what about the complications that come around with not necessarily an estate that has offshore investments. You’ve got offshore investments, but there’s not necessarily a will in that jurisdiction that speaks to that. How complicated does that get, and what needs to be done to not make it complicated?

ALBERT COETZEE: Good question again, Nompu. Offshore investments I can sort of classify in two categories. If I take an offshore investment, with me taking out my allowance every year, so the money is physically overseas, I can classify that as sort of in two categories. When I die, normally you would look at the South African will. But currently what you find, when you look at the will on my death, you need to have the Master involved. You need to have the executor involved. And very often a capital-gain event on death is deemed disposed of before I die, unless my spouse inherits from me.

So that’s the one section. And normally you look after the South African will. It’s fine. It takes longer, it’s slower. And normally the beneficiary can keep the investment overseas, but there are also structures which I’m quite pro on, where, for example, the investor nominates the beneficiary on the application form the day the beneficiary does the investment. The benefit of that though, is that even though the form is a part of the investor’s deceased estate, there’s no capital gain ‘touch wood’ on death. There’s no executor’s fee on death and, very importantly, the investment flows over immediately to the beneficiary.

And there are two additional components which you don’t find in South Africa, which we call “probate”, meaning the overseas executor dealing with my investment. And normally when you nominate the beneficiary on the application form, probate is not applicable. And normally when you invest in shares offshore, another thing is overseas inheritance tax, which we call “situs” tax – you can also exclude that. Again, sitting with an independent advisor, facing all these sorts of things and challenges out there, cost and taxes, out there, if you structure investment correctly, you can actually save a lot of those things on death.

NOMPU SIZIBA: That was Albert Coetzee, the co-head of sales at the Ninety One investment platform.

Brought to you by Ninety One.

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