In his poem ‘The Mistake’, James Fenton talks about the sad truth in making mistakes. He beautifully describes that even with blatant warnings that are ignored or subtle hints that have gone unnoticed, we sometimes go about our lives not knowing about the mistakes we are making and how it will impact our loved ones when we die.
Understanding what the possible mistakes are, enables us to identify these easily. Below are some of the most common estate planning mistakes and how to avoid making them.
- Failure to budget
A basic component of financial planning and estate planning is budgeting. Many people pay their bills and then spend what is left on living expenses with no plan on saving for a future goal. Saving for a financial goal before you determine your spending budget, is an elementary principle many leaned authors refer to as “paying yourself first”. Setting money aside for your investment goals will not only help you make a disciplined effort to save, you will also meet your obligations and live within your means.
- Not updating your will
One of the most important documents a person may need to sign in their life, is their last will and testament. It provides guidance on how their wealth is transferred, yet when a material change in their status happens, they fail to update it- leaving behind a trail of unintended consequences at administration stage. It is beneficial to update your will in the following situations: when you get married, when you become a parent, at divorce, at the death of a spouse or child, when your children are no longer financial dependant on you, when your parents become financially dependent on you or when you have sold assets you have bequeathed in your current will. Due to the constant change in legislation, it is also advisable to review your will every 3 years.
- Not making provision for liquidity
One of the most underrated consequences of death is the need for liquidity in order to be able to meet the financial obligations of your estate. When a person dies, the costs associated with death, together with the taxes and obligations, need to be paid in cash. When there is not sufficient cash in the estate, the executor is faced with a situation where he needs to ask beneficiaries to pay money into the estate or he needs to decide which assets to sell in order to come up with the cash shortfall. In order to manage liquidity, it is advisable to seek expert advice from an estate planning specialist.
- Assuming that the power of a will is absolute
Although a will is very important to distribute your personal assets, it is important to note that there are certain things you cannot address in your will. You will not be able to bequeath the proceeds of life insurance polies contrary to the beneficiary nomination indicated at the relevant institution. You will also not be able to bequeath shares to beneficiaries if you have entered into buy-and-sell agreements with the relevant shareholders. Further, your will can not place unrealistic or unenforceable conditions on your heirs when receiving an inheritance.
- Not managing your trust properly
It is evident from the recent mini budget speech that there is a need for an increase in the collection of taxes. There has also been an intensified focus on misuse of trusts as a method to avoid tax. One of the biggest risks in estate planning is the negative effect mismanagement of a trust may have on trustees, whereby trust property can be deemed to form part of a person’s estate in terms of section 3(3)(d) of the Estate Duty Act.
In order to avoid this, it is essential to ensure that your trust has an independent trustee, that the trust has a bank account and that the financial statements are up to date. The trust deed also needs to be reviewed to ensure that it is in line with current legislation and interpretations of the law, as it sometimes happens that the law changes or there is advancement in technology and therefore our behaviour changes, but the trust deed does not allow for the changed behaviour. It is essential to note that the Trustees can only do what the Trust Deed allows them to do.
- Confusing tax planning for estate planning
Although tax is an unavoidable consequence of life and wealth creation, doing planning based on the tax benefit or the tax implications instead of the practical implications in your long-term planning may lead to delayed tax. Distribution of a capital gain from a trust to an individual may have a short-term tax benefit but the reinvestment of the proceeds may lead to liability for estate duty on the growth. In wealth creation there are various taxes to be aware of, therefore it is much safer to ensure that your long-term goals are met by structuring your estate and family wealth in a way that meets your goals and, thereafter, find ways to manage your wealth in a more cost- and tax efficient manner.
- Not having a blueprint
When asked about wealth strategies, most people are not sure of the effect their death will have on their family and what they can do to reduce their risks and optimise the growth of their wealth. When planning for the future, it is important to know where you are now- this can be done with an estate plan, which shows you what will happen if you die today. Once you know what will happen, you can plan for the event by updating your will, setting up estate structures, which are fitted and catered to your special needs and circumstances, and further ensuring that your wishes are carried out by updating policy information and shareholder agreements.
Knowing what your goal is, ensuring that you stick to your plan and understanding how the above mentioned issues can impact on your financial journey, will enable you to easily identify the risks and address them as they occur. Getting a specialist advisor on board may help avoiding mistakes and may help preserve wealth for future generations.
Louis Jooste is a fiduciary specialist at FNB Fiduciary Advice.