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Estate planning is not only for the wealthy

Reader’s questions answered.

CAPE TOWN – In this advice column Marteen Michau from Sanlam Private Wealth answers questions from a reader who needs more information on estate planning.

Q: Is it wise to nominate your estate as the beneficiary of policies?

If there is excess in the estate after paying off liabilities, what happens to that money if there is no will? Will young children be considered?

Many people make the mistake of thinking that estate planning is only necessary for those who have a lot of money. The truth, however, is that everyone should put the basics in place, and that includes signing a will and planning for the cash needs of your family immediately after your death.

To understand why this is so important, it is necessary to explain what happens in practice upon someone’s passing.

Your Last Will and Testament deals with all the assets in your own name, including assurance policies on your life payable to your estate on your death. All these assets will be subject to executor’s fees.

The maximum tariff that an executor may charge to administer and wind up your estate is 3.5% of the gross value of the assets (excluding VAT). That would include the value of any policies payable to your estate.

You can nominate an executor in your will and even negotiate discounted fees beforehand. You can place it on record in the will that the nominated executor has agreed to charge at a reduced rate.

When you die, your nominated executor will complete the necessary forms to report the estate with the Master of the High Court. The Master’s Office may thereafter issue a letter of executorship to the nominated executor, who is then formally appointed and may only then act in that capacity.

Before the date of issue of this letter, your entire estate will be frozen. That means that no one would be able to do anything with any of your assets. When the bank is informed of your death, they will freeze your bank accounts. They will only transfer funds out of the bank accounts once the executor is appointed and the bank receives his instructions.

In light of the above, if you nominate your estate as the beneficiary of your life policies, your surviving family members may potentially have two problems. The first is that the executor may claim a percentage of the proceeds as fees, and the second is that your family may not be able to access these proceeds immediately.

While the application for appointment of the executor is being processed by the Master’s Office, your surviving family members may be without the necessary cash flow to meet their ongoing monthly expenses. This may be particularly true if you are the breadwinner, if the only bank account of the family is in your name or if you are married in community of property when both spouses’ accounts may be frozen.

If your estate is nominated as the beneficiary of assurance policies, or if there are no nominated beneficiaries on such life policies, the proceeds of these policies have to be paid into your deceased estate. This can only happen once the executor has been formally appointed and has applied for the proceeds to be paid into the estate bank account (which has to be opened first).

If, however, you nominate your spouse or heir as beneficiary on your life policy, they can lodge your death certificate with the assurance company and apply for the proceeds to be paid directly into their personal bank account. This means they can receive the pay out without delays in waiting for appointment of your executor and without executor’s fees being levied on the proceeds.

These funds would be available to your family within a short period of time, thereby helping to provide for any cash needs for monthly expenses while your estate is frozen or the administration process is still under way.

If you do not sign a will, your estate will devolve according to the rules of intestate succession. This could mean that someone who you would have liked to inherit something from you may not receive it.

Without a will, there is also no nomination of an executor by you, which means that nominations for an executor would have to be obtained from your closest family. That could, again, delay the process.

In your will you would also normally specify that an appointed executor does not have to provide security to the Master of the High Court. However, without a will that contains this clause, the Master’s Office could demand that the executor take out a bond of security with high premiums to secure the estate assets before any action can be taken. Again this could lead to unnecessary delays and costs.

These are just some of the financial and other problems that your family may be faced with after your death if you do not have the proper planning in place. It is fair to say that they will appreciate the time and effort you put into any such planning, especially that you considered them in providing for them even after your death.

Marteen Michau is the head of Fiduciary and Tax at Sanlam Private Wealth.

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