An estate comprises all the assets and liabilities accumulated over a lifetime. While often seen as preparation for death, estate planning is largely about structuring and managing assets while alive. It should not be viewed solely as final stage financial planning for securing a legacy, but rather as an ongoing process of managing assets and liabilities to achieve lifetime goals and posthumous objectives. Given its multi-disciplinary nature, an estate plan can help achieve a wide range of goals.
Determining estate liquidity
Ensuring liquidity in your estate is crucial for covering estate costs and liabilities without affecting the financial inheritance intended for your loved ones. When preparing liquidity calculations, consider potential tax, capital gains, estate duty liabilities, and any outstanding debts. Remember, SARS and creditors are paid first during estate administration, with the remaining balance, if any, distributed to your heirs. Insufficient liquid cash may force the executor to sell assets such as your primary residence, vehicles, holiday home, or other valuable items to pay off debts. This can significantly compromise the financial security of your spouse and children, potentially leaving them in a precarious situation due to inadequate estate planning. Proper estate planning is essential to avoid such outcomes, ensuring that your loved ones are financially secure and that your assets are distributed according to your wishes without unnecessary hardship.
Ensuring beneficiary nomination
Beneficiary nomination is not a one-time task; it should be regularly reviewed and updated as your personal and financial circumstances evolve. Understanding how beneficiary nomination works for each type of policy or investment is crucial to meeting your objectives. For example, when your children are minors and legally incapable of inheriting, you might use a testamentary trust structure as the beneficiary for your life cover. As your children reach the age of majority, you may then choose to name them personally as beneficiaries to ensure the proceeds are paid to them directly. Additionally, if your goal is for retirement fund proceeds to secure your loved ones financially, it’s essential to understand the limitations imposed by Section 37C of the Pension Funds Act. Unlike life policies, the distribution of retirement fund benefits—such as pension, provident, preservation, and retirement annuity funds—is ultimately determined by the fund trustees. They are responsible for identifying all your financial dependents and allocating benefits accordingly, which may not align with your personal wishes. Regularly updating your beneficiary nominations ensures your intentions are honoured and your loved ones are adequately provided for.
Drafting your legacy documents
A crucial part of estate planning is ensuring your legacy documents are properly drafted, valid, and reflect your wishes for estate distribution upon your death. Alongside a well-drafted will, an organized estate planning file is invaluable for your loved ones and can expedite the estate winding-up process. Essential documents include your birth certificate, marriage certificate, antenuptial contract, divorce certificate, maintenance orders, title deeds, trust deeds, and share certificates. Additionally, keep handy information such as gun licenses, safe codes, loan agreements, digital passwords, login credentials, and alarm codes. Having these documents and information readily available ensures a smoother process and aligns with your estate planning objectives.
Protecting the inheritance of minors
If you have minor children, structuring your estate to ensure their adequate provision in the event of your passing is crucial. Children under 18 cannot inherit lump sum payouts or other assets directly, as they lack the legal capacity to manage such assets. Therefore, if you intend to name a minor child as a beneficiary of a life insurance policy or bequeath immovable property to them, it’s essential to understand the available estate planning mechanisms to achieve your objectives. This might include forming a testamentary trust in your will and naming your minor child as the beneficiary. In the event of your death, any assets intended for your minor children can be transferred to the trust, which will manage the assets until your child reaches the age of majority.
Ensuring efficient estate administration
Effective estate planning ensures the expedited winding up of your estate and avoids unnecessary delays. Simple steps like validating your will, communicating its location, appointing a professional executor, and keeping an organized file of estate planning documents can streamline the administration process. For example, if your executor lacks a copy of your marriage certificate, they will need to apply for one at the Department of Home Affairs, causing delays. Proper planning and document organization significantly benefit the estate administration process.
Reducing tax liabilities
While avoiding tax is impossible, proactive estate planning allows you to reduce the tax obligations of your estate upon death. Estate duty, essentially a tax on transferring wealth from your deceased estate to your beneficiaries, is levied at 20% on the dutiable amount up to R30 million and 25% on amounts exceeding R30 million. The dutiable value of your deceased estate is calculated by adding the value of your property, deducting allowable expenses, and then deducting the Section 4A rebate. As a South African resident, you will be taxed on your worldwide assets. However, several mechanisms can reduce estate duty liability and maximize your loved one’s inheritance. Compulsory retirement funds, including pension, provident, preservation, and retirement annuity funds, are not considered property in your deceased estate and are not subject to estate duty. Living annuities are valuable estate planning tools as they also fall outside your estate and are not estate-dutiable. Additionally, domestic life policies can provide financially for your loved ones while the deemed property in your estate can be exempt from estate duty provided they meet certain criteria. Trusts, discussed below, can be used effectively to house growth assets and reduce estate duty liabilities in one’s deceased estate. These strategies can collectively help in efficient estate planning and securing your beneficiaries’ financial future.
Structuring growth assets appropriately
In terms of the Income Tax Act, death triggers a capital gains event, where the departed individual is deemed to have liquidated their assets at their market value upon demise. Although the Act offers a one-time exclusion of R300 000 in the year of passing, any surplus incurs a 40% inclusion rate, liable to taxation based on the deceased’s marginal tax bracket. Mitigating potential CGT upon death necessitates strategic estate planning, particularly in structuring appreciating assets like real estate or equities to minimize tax liabilities within the estate. An effective approach involves the establishment of an inter vivos trust during one’s lifetime, especially for assets intended to benefit future generations. As the trust’s originator, transferring assets—such as a vacation property—entails either donation or sale to the trust through a loan account arrangement. Subsequently, relinquishing control of the asset enables trustees to manage it on behalf of designated beneficiaries. By transitioning a growth asset into a living trust, the asset’s appreciation remains within the trust, while only the seller’s loan account becomes repayable upon demise, thereby reducing estate duty obligations.
Have a wonderful day.
Sue
