Estate Planning: A tactical multi-faceted exercise

Creating an estate plan is an important responsibility but, sadly, one that many South Africans fail to undertake. If you have assets, it is advisable to put an estate plan in place to ensure that your loved ones are protected from legal hassles and administrative delays in the event of your death and that the intended recipients receive their inheritance. That said, estate planning is a multi-faceted exercise that, depending on the size and complexity of your estate, should be undertaken together with an expert in this field.

Through the development of an estate plan, you are able to achieve a number of objectives, not least of which is to reduce the costs in your estate so as to maximise the amount available for distribution to your heirs and legatees. Estate planning documents such as wills, codicils, asset maps, trust deeds and living wills can be used to carefully express your wishes and to map a process to be followed upon your passing which will ensure the smooth transference of your wealth.

It can assist in the efficient administration of your deceased estate to ensure that the distribution of your assets is expedited and that your loved ones are not left in a financially vulnerable position while awaiting the finalisation of your estate. Estate planning can be particularly useful where complex family structures as a result of previous marriages and divorces exist and can be used to address potential problems that very often arise in such circumstances.

Another important aspect of estate planning is to ensure that there is sufficient liquidity in your estate to meet its tax liabilities and other estate costs as insufficient liquidity can result in the forced sale of assets and heartache for your loved ones. Estate liquidity can be secured through the tactical application of tools such as life insurance policies, although it is important to note that the appropriate structuring of such policies is paramount, including the manner in which your beneficiaries are nominated. If you have minor children or beneficiaries with special needs, there are a number of useful estate planning tools that you can employ to ensure that assets intended for their benefit are protected and managed.

Depending on the nature of your assets and your intentions for them in the event of death, your estate plan could also include trust administration to provide for the growth of assets outside of your personal estate. If you are self-employed, you may want to consider implementing mechanisms to ensure that your personal assets are protected from business creditors; whereas if you have interests in a business, business assurance mechanisms can be employed to ensure that these interests are protected in the event of your death and that appropriate business succession is provided for. Naturally, if you have foreign assets, an estate plan which makes provision for those assets is important to ensure that the probate requirements of the foreign jurisdiction are complied with.

In preparation for the development of your estate plan, it is advisable to give consideration to the following:

  • Your assets and liabilities: The first step to developing an estate plan is to take an inventory of all your assets and liabilities, including the value, type, location, whether it is co-owned or encumbered, and to consider what your intentions are for each asset in the event of death.
  • Your marital regime or life partnership: Your matrimonial property regime and marriage contract are fundamental to your estate plan as these set out the financial consequences of your marriage. Similarly, if you are in a same-sex or heterosexual relationship, this too has consequences when it comes to your estate plan.
  • Your financial dependants: It is important to identify those who are partially or wholly dependent on you, who you wish to provide for should something happen to you today, and for how long. Your financial dependants could include minor or adult children, special needs beneficiaries, aged parents, a domestic worker, siblings, or anyone else you feel obliged to assist financially if you were no longer around.
  • Estate duty: Calculating your estate duty liability and ensuring that there is sufficient liquidity in your estate to cover these costs is essential. Estate duty is payable at a flat rate of 20% on the net value of a deceased estate up to R30 million, and at a flat rate of 25% to the extent that the net value of the estate exceeds R30 million, keeping in mind that an abatement of R3.5 million is allowed against the net value of the estate to determine the dutiable value of the estate.
  • Capital gains tax: Capital gains tax is another form of tax that must be taken into consideration when considering the liabilities in your deceased estate because your death will trigger a capital gains event. In the event of your death, you will be deemed to have disposed of your worldwide assets for an amount equal to their market value on the date of your death. This means that if you acquired assets such as immovable property which is sold for more than you paid, your deceased estate will be taxed on that gain before the proceeds are distributed to your heirs. Keep in mind that assets bequeathed to a spouse will receive a ‘roll-over’ of the base cost meaning that the capital gain on such assets will not be immediately payable by your estate but rather when the inheriting spouse disposes of such assets.

As mentioned above, there are several estate planning tools which can be employed tactically to make your estate plan more effective, including the following:

  • Testamentary trust: Children under the age of 18 lack contractual capacity and are therefore not capable of inheriting directly, which makes a testamentary trust an effective tool for housing assets intended for minor children. This type of trust can be set up in your will with your minor children as the nominated beneficiaries.
  • Inter vivos trusts: Also known as a living trust, this estate planning tool allows you to peg the value of assets in your personal estate while allowing the growth of those assets to take place in the trust, which can reduce the estate duty liabilities in your estate. For instance, to reduce estate liabilities you may wish to sell your holiday home to a living trust which effectively fixed the value of the property in your personal estate. Then, by using your annual donations tax exemption of R100 000, you can effectively reduce the value of the loan account each year at the same time ensuring that future growth in the asset takes place within the trust.
  • Donations: Donations during your lifetime can be used to reduce the value of your estate for estate duty purposes keeping in mind that individuals have a R100 000 per year exemption whereafter donations tax is payable at a flat rate of 20%. Donations between spouses are exempt from donations tax, while donations to certain public benefit organisations are also exempt subject to certain thresholds.
  • Section 4q deduction: In terms of section 4(q) of the Estate Duty Act, no estate duty will be payable on bequests to your surviving spouse including proceeds from a domestic life policy. In the context of the Estate Duty Act, the definition of ‘spouse’ includes those legally married in terms of South African law, those in a customary union, people in a partnership recognised as a marriage by any religion, and those in a same-sex or heterosexual union.
  • Bequests: An estate planner can bequeath a cash legacy to a beneficiary in their will but, in doing so, should ensure that there is sufficient liquidity in their estate to honour such bequest. What is important to remember is that, once all debt has been settled, legatees will be paid their bequests before your heirs receive the residue of your estate. Once again bequests to a surviving spouse and certain public benefit organisations are exempt from estate duty.
  • Insurance policies: The proceeds from domestic life policies are generally considered deemed property in a deceased estate and therefore subject to estate duty, and these costs should be borne in mind when using a life policy to create liquidity in your estate. However, in certain circumstances, the proceeds of domestic life policies can be excluded for estate duty purposes such as in the case of key person assurance, buy and sell assurance, or life policies in favour of a spouse or child.
  • Living annuities: Living annuities make excellent succession planning tools because, unlike retirement funds, you are free to nominate beneficiaries as you wish, with the assurance that those nominated will receive the funds in the event of your death. Further, if you’ve nominated beneficiaries, the proceeds will not form part of your deceased estate for estate duty purposes and will be available to your beneficiaries who will have the option of transferring the living annuity into their own name, taking it as a lump sum, or a combination of the two.

As is evident from the above, an estate plan has a number of moving parts which need to mesh together to ensure that your overall objectives are met. As your wealth accumulates and your circumstances change, you will need to adjust and update your estate plan so that it remains optimally aligned with your intentions for wealth transference.

Moneyweb | Gareth Collier | Crue Invest (Pty) Ltd | 12 July 2022