Having a valid and up to date will in place is a very important element of a comprehensive financial plan, but this is not the only element required for sound estate planning.
These seven tips will help you to prepare for the inevitable. It includes evaluating the liquidity of your estate, communicating with your heirs, and re-assessing your trust-related estate planning goals in general.
1. Define the assets in your estate
The first step in estate planning is determining exactly what assets make up your estate. For married persons, their marital property regime will impact what is considered part of their estate, or part of a joint estate. Certain assets are considered deemed property for estate planning purposes only, and not factored in when calculating executor’s fees. The distributable estate will consist of assets that attract executor’s fees and is distributed to heirs in terms of a will.
One’s dutiable estate is what estate duty is calculated on: some assets might be dutiable but not distributable, but all distributable assets will be dutiable unless excluded by Section 4 of the Estate Duty Act. Life policies that pay out to a beneficiary could be dutiable, as a deemed asset, but it will not be distributed to that beneficiary in terms of the will, but in terms of the beneficiary nomination. If that same policy pays out to the estate, it will be dutiable and then distributable in terms of the will. Retirement annuities, living annuities, and pension funds do not form part of the estate unless they pay out to the estate: keep your beneficiary nominations updated.
2. Scenario plan and compare
The same assets, bequeathed to different persons or entities could yield alternative taxation scenarios. If you leave your entire estate to your spouse, Section 4(q) of the Estate Duty Act applies, and all assets bequeathed to such a spouse will be estate duty exempt. If you bequeath the same assets rather to an inter vivos trust, of which your spouse is not a beneficiary, then the estate duty calculation will be very different. Part of estate planning is comparing different scenarios, not just the order of passing but the impact of who the heirs are.
3. Test the liquidity of your estate
Part of effective estate planning is to ensure there is sufficient liquidity in the estate to cover all administration costs, taxes and duties payable on death. Estate duty is levied on global assets, and that needs to be kept in mind in terms of liquidity. If the intention of the testator is for the offshore assets to remain abroad without having to repatriate or liquidate those assets, you may want to consider a life policy that will pay out to the estate and ensure estate duty and subsequent executor’s fees are provided for by the cover to avoid having to sell any international assets to cover these costs locally. What could be payable by an estate: executor’s fees, Master’s fees, transfer costs, estate duty, capital gains tax. Estate planning means estimating what those costs might add up to and comparing that with cash and/or cash assets in the estate.
4. Invested offshore? Make use of favourable laws in offshore jurisdictions
Certain offshore investment jurisdictions have laws in place allowing co-ownership of investments, and how they are dealt with on the passing of one of the co-owners is a helpful estate planning tool. For example, when money is invested in a jurisdiction such as Guernsey in the Channel Islands, include your spouse as a co-owner on the investment. This way any SA donations tax (as it is a donation between spouses) can be avoided and thus benefit from Guernsey’s joint tenancy rights. In short, joint tenancy rights mean the passing of ownership on survivorship; the half of the investment owned by the deceased will automatically accrue to the remaining surviving spouse. This avoids having to apply for a Guernsey grant of probate to transfer ownership of the investment. Keep in mind, however, that the half share of the investment still forms part of the deceased’s estate for estate duty purposes; it does not bypass the South African estate. It must be included in the estate duty calculation: but as the half share accrues to the surviving spouse, Section 4(q) applies, and that amount will be exempt.
5. Trusts and estate planning
When deciding if a trust is the correct estate planning tool for your estate one would have to compare the cost of transferring assets to a trust, the related capital gains tax and/or donations tax and/or interest payable on loan accounts where Section 7C would apply. For larger estates, for assets over R30 million, placing assets into a trust could ultimately be the more ‘affordable’ option when compared to paying 25% in estate duty. It seems that the increase in estate duty levied negates the Treasury’s intention of limiting the use of trusts for estate duty avoidance purposes.
Keep in mind, when utilising an existing inter vivos trust for estate planning purposes, local South African trusts cannot own direct offshore assets. If you have offshore investments or property and you have bequeathed specific assets or your entire estate to a trust, those offshore assets will have to be liquidated and repatriated in rand terms to be placed into the trust. Make sure that the trust in question and your estate planning outcomes, as well as investment goals, are consistent with each other.
6. Know what documents are important for safekeeping
This cannot be stressed enough – keep important documents in a safe and accessible location. Not only is it important to keep the will and testament safe, but certain documents that accompany the will when reporting an estate are just as valuable and can avoid delays for the executor in winding up the estate.
Important documents to keep together: ID document, marriage certificate, antenuptial contract, divorce orders and decrees, death certificates and estate duty returns from a predeceased spouse’s estate, original title deeds, car registration papers, just to mention a few. Replacing or obtaining copies of certain documents can be costly and time-consuming.
7. Communicate with heirs
The heirs of an estate, in most cases a surviving spouse, can play a vital role in the deceased administration process. Executors are only legally privy to all financial information only once they have been formally court-appointed and issued the Letters of Executorship. This can occur weeks, if not months after the date of death. The heirs and/or spouse become the direct line of communication in terms of the deceased’s assets and liabilities.
Death and money matters are not always the most pleasant of conversations but giving heirs or a spouse a basic outline of assets and liabilities in an estate, as well as information about life policies or annuities from which they might benefit, can greatly relieve the burden when they experience the loss of a loved one. Sharing access information to electronic devices, email accounts, cryptocurrency private keys, or a safe, can also assist an executor with gathering information as well as ensuring the correct management of assets.
As with most matters related to money and investments, it is highly advisable to consult a professional to make sure it is approached correctly to achieve particular goals. Brenthurst Wealth has a team of highly qualified financial advisors to provide guidance as well as fiduciary specialists to manage the drafting of a will and assist with comprehensive estate planning and deceased estate administration.