Freedom of testation means that you can use your will to distribute your assets amongst your heirs as you see fit, with a few common law exceptions. However, your last will and testament is only one mechanism in an arsenal of estate planning tools available to help you maximise your legacy. Effective estate planning involves making full use of the mechanisms available to you when structuring your affairs and crafting your legacy.
Your matrimonial property regime
Your matrimonial property regime affects how your assets will be dealt with after your death and therefore needs to be taken into account when planning your affairs. If you are married in community of property, it is important to bear in mind that the joint estate will be dissolved in the event of your death, and your surviving spouse will have a claim for 50% of the value of the net joint estate. You can therefore not fully bequeath property which is owned by the joint estate. Your surviving spouse’s share of the joint estate does not constitute an inheritance and no inheritance tax will be payable. The other 50% of the net estate is yours to bequeath to your heirs and legatees. If you are married with the accrual system, the accrual contract comes into effect on your death. The executor of your estate will determine whether any assets were excluded from the estate to which the accrual applies. Thereafter, the increase in real value of your estate will be added up and divided by two. Your surviving spouse will then have an accrual claim against your deceased estate where your estate exceeds hers. Conversely, if your estate is less than that of your surviving spouse, your deceased estate will have a claim against your surviving spouse for your share.
Understanding how your matrimonial property regime affects how your assets will therefore affect how you structure your will. Your will is one of the most important tools in your estate plan and is important to get it absolutely correct because your entire estate plan hinges on the accuracy, clarity and validity of your will. Many of the other estate planning tools that you employ – such as trusts, donations and bequests – can be rendered ineffective if your will is not correctly set up. A well-structured will ensures that you can prevent intestacy, achieve efficient estate administration, and be intentional about how your assets are distributed to your heirs and legatees. It can also be used effectively to reduce your estate duty liability, nominate an efficient executor, and make provision for your surviving spouse and/or minor children. When drafting your will, it is vital to ensure that it is both practical and legal to avoid delays, confusion and/or unintended consequences. For instance, a provision in your will that your child may only inherit on condition that he does not enter into a same sex marriage would be invalid because it discriminates against someone on the basis of their sexual orientation and is therefore unconstitutional. In addition, it is best to leave insurance policies nominated to beneficiaries and retirement funds out of your will. If you have named a beneficiary to your policy in terms of your life assurance contract but nominate a different beneficiary in your will, this can cause confusion. It’s also not possible to bequeath your retirement fund benefits as these do not form part of your estate and their distribution is in the hands of the fund’s trustees as determined by the Pension Funds Act.
As the testator, there are many different ways to benefit your beneficiaries. You can choose to leave someone your entire estate or leave them a particular item, such as a car or a cash amount. If you want to leave a particular item or a specified sum of money to one of your beneficiaries, this can be done through a special bequest and the beneficiary receiving this benefit is known as a legatee. The person (or people) who inherit the residue of your estate are your heirs. When distributing your assets, the executor will first use your assets to pay the costs of administering your estate and to pay your creditors. Thereafter, your legatees will receive any legacies due to them in terms of any special bequests you have made. Lastly, whatever is left in your estate will be awarded to your heirs. When making bequests in your will, it is important to first ascertain whether there is sufficient liquidity in the estate to give effect to your wishes. Importantly, the testator should also give consideration to any encumbered assets. For instance, if you bequeath a bonded property to a legatee bear in mind that the executor will have to settle the bond from the residue of the estate before he can transfer the property to your named beneficiary, and this could significantly reduce what is left for your heirs to inherit.
Trusts make excellent estate planning tools as they can serve to both protect assets intended for your loved ones and reduce taxes, with certain trusts also enjoying protection from creditors. However, a trust must be correctly set up for the right purposes and in the right manner to ensure that it is valid. There are also costs involved in setting up trusts, and these costs need to be weighed up against the benefits of having the trust to ensure that it makes financial and practical sense. A testamentary trust, which is set up in terms of your will, is the most widely used trust in South Africa and can be used to protect the assets bequeathed to a surviving spouse, minor children or children with special needs. Many estate planners make use of inter vivos (living) trusts to house growth assets such as property or shares as they provide an effective means of transferring assets down generations, reducing estate duty, and keeping assets safe from creditors. When it comes to reducing estate duty, transferring immoveable property into an inter vivos trust ensures that any growth in the value of the property is contained within the trust and does not accrue in your personal estate. However, saving on taxes and estate costs should not be the overriding reason to form an inter vivos trust, and the estate planner must be clear of his intentions before forming a trust. Generally speaking, property should only be moved into a trust if it is the estate planner’s intention to keep the property for a longer period of time or if he wants to protect it from creditors.
Donations are another effective tool which can be used to reduce the value of your estate during your lifetime which, in turn, can have the effect of reducing one’s estate duty liability. However, before including donations in your estate plan it is important to understand whether there are any donations tax implications. Donations are regulated by the Income Tax Act and are subject to donations tax at a flat rate of 20% of the value of the donation not exceeding R30 million and 25% on the value exceeding this amount. This is subject to a number of exceptions. Donations between spouses are exempt from tax, as well as donations to government, registered political parties or any approved public benefit organisations. Further, individuals are permitted to make donations of up to R100 000 per year on a tax-free basis. However, before using donation exemptions to reduce your estate taxes, think carefully whether losing control of an asset or assets during your lifetime is in line with your objectives and needs.
Life insurance policies can be used to create liquidity in your estate and to make financial provision for your spouse and/or beneficiaries. However, as with other estate planning tools, it is essential to correctly structure your policy so that it serves its intended purposes. If you nominate a beneficiary or beneficiaries on your life policy, bear in mind that it will be regarded as deemed property in your estate and the value of the policy will be take into account when calculated estate duty. Domestic key person and business assurance polices are, however, exempted from estate duty, but the correct structuring of these policies is critical to ensure their validity. In calculating the appropriate level of life cover required, it is important to take into account factors such as how much debt would need to be covered in the event of your death, your estate duties and taxes, and the extent to which you would need to provide for your loved ones. Insufficient liquidity in your estate may mean that your executor has to sell an asset intended for your heirs and this could leave your heirs inadequately provided for.
Living annuities do not form part of your deceased estate and are therefore useful when it comes to passing on invested capital to your loved ones while at the same time reducing estate duty. Unlike in the case of pension funds, you are permitted to nominate the beneficiaries (including trusts) to your individually owned living annuity. On passing, the remaining capital invested in your living annuity will be transferred to your loved ones without attracting estate duty or executor’s fees. If you have not nominated a beneficiary to your living annuity, the proceeds will be paid into your deceased estate but will not attract estate duty, although the executor is entitled to charge a fee. As an estate planning tool, a living annuity is advantageous for your loved ones as it gives them almost immediate access to the capital and income from the investment. Your loved ones can choose to make a full or partial withdrawal of the capital, bearing in mind that they will be taxed as per the retirement tax tables. Alternatively, they can keep the annuity in their names with the option of adjusting the drawdown rates and underlying investment portfolios.