Part I – What is Estate Planning?
When the topic of estate planning is mentioned, most people immediately dismiss it on the basis that their estates consist of “nothing” and that the costs and effort involved are not worth it.
Nothing could be further from the truth and every person who has any assets should have an estate plan in place. It is too late to provide instructions to your family as to how your estate is to be wound up after you have passed on!
There are of course very complicated estate plans in place where planners have had to provide for the distribution and investment of vast sums of money, and there are other plans which have been established to facilitate the winding up of the smaller estates.
Estate planning can be used for a number of purposes. Some of these are:
Providing easy and efficient distribution of one’s assets to the correct heirs and beneficiaries.
Ensuring that on death there is sufficient cash on hand to provide for immediate expenses.
Providing for minor children and resolving issues such as maintenance for spouses, former spouses and children.
Minimising the liability for estate duty.
There are many other factors and aims and objectives which are involved in estate planning. Several scenarios will be dealt with in this particular series of articles, and some practical advice and information will be provided and the various implications of planning one’s estate will be dealt with.
The estate planning exercise is also not necessarily hugely expensive. In fact, it starts with the most basic, but vitally important document – the Last Will and Testament – of which much has been written (in this regard see the earlier articles which have been published on our website).
This document is effectively the foundation of any estate plan, whether huge amounts are involved, or where the testator has the foresight to facilitate the easy winding up of his.
This last will and testament provides the framework around which the plan will revolve. It will provide for the distribution of assets, the payment of liabilities, and caters for many of the objectives of estate planning – from the basic objective of setting up a trust for minor children, for example, to the preservation and maintenance of the estate assets, the continuation of businesses, the provision of guardians for children and so on.
As the estate planning exercise is an ongoing work in progress it should be reviewed regularly, where there is a change in employment or marital status, where children are born, where appointed executors and trustees die or leave the country. If no major events occur, then, when the annual tax returns have to be furnished, the estate plan should be reviewed at the same time.
The will is an important document, however “simple’ or uncomplicated it might appear and should be accorded its due importance.
1. Ensuring that the correct beneficiaries inherit
The will provides for the easy distribution of assets. If properly drafted it will make the distribution and the winding up of the estate more efficient. A will ensures that beneficiaries are properly identified and that due and lawful beneficiaries receive their rightful benefits. If no will is in place, it may occur that the estate assets can be given to others at the expense of the true heirs.
A man and a woman live together and they are not married to each other but they live together as effectively as a husband and wife would.
He has two children from a previous marriage, and he does not communicate with them at all.
She assists him in building up his estate.
The man now dies without a will.
The woman has helped him build up a very large estate.
The South African law of intestacy (dying without a will) decree that his children will inherit his (now vast) estate to her detriment. This is patently unfair, but the reality is that he should have planned his estate and provided for her in his will, but because he has not done so, she is prejudiced. Severely so.
Having a will is the cornerstone of any estate plan. For anyone with children or dependents, the consequence of not having a will may be devastating.
2. Ensuring that there is sufficient liquidity in the estate
This is an important part of estate planning. The planner must ensure that there is sufficient liquidity to allow for the immediate expenses after death. Funeral expenses, final death bed expenses, executors fees and any legal fees and of course living expenses for the family so that they may survive while the estate is being wound up. Bear in mind, too that where immovable property is bequeathed to children or spouses, cash will be needed to pay the conveyancer’s fees to transfer the property, and there may be debts and charges accruing to the property which if there is no ready liquidity, may result in the property having to be sold, and this might not be in the interests of the survivors.
The interest on bonds and credit cards does not stop running on death! It is prudent estate planning to ensure that there is sufficient money on hand to deal with those liabilities so that the heirs and beneficiaries will not be prejudiced.
Insurance policies may be useful in preparing for this eventuality.
Provision for the maintenance of children and surviving spouses
Any prudent testator or testatrix would provide in an estate plan, for the payment of maintenance. Whilst it is axiomatic that maintenance must be paid, even after death, this is offten ignored – “there is nothing in my estate – why bother to plan?” A careful assessment of an estate plan will ensure that on death provision is made for the maintenance of children and surviving spouses. Estate plans are particularly pertinent where the testator or testatrix has re-married and has left children of both spouses. The second spouse may feel that “her” children should benefit at the expense of the first marriage’s children. The executor may therefore be faced with the situation where none of the children can attend university because there is not enough for everybody! If an estate plan was properly done, this problem could have been avoided. A proper estate plan therefore will take this into account.
Estate planning is also vital where businesses are concerned. Provision, if made, will allow an orderly succession of control in businesses that have been painstakingly built up by the deceased. Succession planning could also ensure that minor children would not lose future maintenance which would happen if the businesses had to be sold at bargain-basement prices.
The formation of trusts could be used in this instance to cater for the continuation of businesses.
Minimising estate duty
This is often the main raison de’etre for any estate planning exercise and as estate duty only comes into effect where the net value of an estate is R 3 500 000, many people perceive the concept of estate planning as being unnecessary where the estate is less than the R 3 500 000.
If no estate planning is done, an estate can be loaded with estate duty, for example, which might be easily avoided.
A wife has a net estate of R 8 million.
She is survived by her husband and two children.
If she leaves the R 8 million rands to the children, the estate duty account looks like this:
The net value of Estate (in Rands) 8 000 000
Less rebate 3 500 000
Dutiable estate 4 500 000
Estate duty @ 900 000
If however, an estate plan was properly structured, the distribution could be as follows:
Net Value of Estate (in Rands) 8 000 000
Less inheritance to husband 4 500 000
Net estate 3 500 000
Less rebate 3 500 000
Dutiable estate 00
Estate duty @ 00
The estate plan is simple, but, merely by using section 4(q) deduction as provided for in the Estate Duty Act, an amount of R 900 000 in estate duty is saved. (Section 4(q) provides that any amount bequeathed to a surviving spouse is free of estate duty.)
Estate planning, therefore, can be a simple exercise, involving no more that the drawing up of a good, will; or it can be the culmination of years of intense planning, setting up prudent tax-efficient structures, family trusts and family. Whatever the value of the estate is, estate planning can save much heartache and money.
In the next article, we will deal with the use of Trusts as safe havens for assets.