Estate planning 101 serves as your complete guide on all things estate planning. In addition, knowing the tools available to you to enhance and maximise your estate planning strategy will be covered. These include everything from a last will and testament, the use of trusts, donations, marital property regimes, and what to do if you have a global asset base. We conclude by considering the tax implications when formulating your estate plan.
Putting together an estate plan is the area within the context of broader financial planning often given the least attention. Planning for death and its consequences is often uncomfortable to think about, let alone plan for. But if you have anyone that is dependent on you, it should be the most important part of your holistic financial planning strategy.
Because if you die without having done the necessary planning, not only is it likely that the wishes you have for how your assets should be distributed may not be followed, but those you care most about could be left vulnerable and in a very difficult financial situation. Our video below summarises some of the key concepts you should be aware of – but do read the article in full for all the detail.
Table of Contents
Estate Planning Is Multi-Faceted
An estate is simply the assets and liabilities you have accumulated during your lifetime and what you leave behind on your death. Estate Planning is therefore a multi-faceted process that considers your financial, psychological and economic situation – and how the goals you have in relation to your estate while you are alive and eventually pass on, are fulfilled.
Stated another way, estate planning is about the most effective and beneficial distribution of your estate on death to succeeding generations in accordance with your wishes. It is not a once-off activity but something that evolves and changes as your assets and wishes change.
Estate Planning 101: The Basics
The first step in Estate planning 101 is taking an inventory of your assets and liabilities. Knowing what you have is where it starts. Next, it’s about setting goals and understanding how you want your assets or estate to be distributed. That will mean formulating a clear idea of who should inherit what, when, and how much. It may be as simple as leaving everything to your spouse or significant other – or strategizing for the transfer of inter-generational wealth using more complex arrangements.
The size and complexity of your estate often determines how much time and detail should be spent on this. Sadly, the bigger the estate, the more likely it is that there end up being disputes amongst family and heirs about who is ‘entitled’ to inherit. That’s why planning is so important.
Understanding that estate planning 101 also means that every financial decision you make will have an impact on your estate planning. That includes everything from drafting a valid and up to date will (when last have you reviewed yours?), how you structure your investments, the debts you have outstanding, the beneficiaries you nominate on your policies, how you use retirement savings vehicles, whether you invest internationally etc.
Estate planning 101 means knowing that no financial transaction happens in a vacuum. That is why the sooner you start and begin formulating your plan, the more comfort and confidence you can take, knowing that the people you most care about will be taken care of, no matter what happens.
Estate and Financial Planning
Estate and financial planning are two side of the same coin. They work jointly and alongside each other. It’s also easy to assume that estate planning is something only done by ‘older’ or wealthy people. Once you start accumulating assets (and liabilities), no matter your age, you should be crafting an estate plan in conjunction with your broader financial plans.
It might be as simple as nominating a beneficiary or drafting a will to begin with. And as your life and circumstances evolve – from forming relationships to having children – your estate planning will become more complex and will need to evolve accordingly.
The team or people you need to assist you with estate planning is also not static. Initially your financial advisor can assist with or facilitate the basics like having a will drafted, performing a liquidity calculation and identifying any shortcomings.
But once the complexity increases and your assets and wealth grow, it may mean appointing lawyers, tax consultants and other professionals to assist.
Much like financial planning – estate planning is not a static or single event you perform. Like all the components of financial planning, estate planning needs to be reviewed and updated on a regular basis.
Estate Planning Purposes and Objectives
There are several estate planning purposes and objectives to consider and plan for. Ultimately the main purpose is for you to enjoy maximum use and benefit from your assets while you’re alive – and then for your dependents to continue to benefit from your accumulated wealth on your death, according to your wishes.
Ensure your estate is wound up efficiently and effectively
The administration of a deceased estate is often a lengthy (and sometimes complex) process. If proper planning hasn’t been done, this process can be delayed and costly, leading to heirs and dependants suffering emotional and financial hardship.
Make sure your wishes are fulfilled in terms of heirs and legatees you want to inherit
Without a valid last will and testament, you die what is known as ‘intestate.’ That means your wishes may not be fulfilled. According to the Intestate Succession Act, if you die without a valid will, your estate will be divided according to a set formula amongst your spouse, children, siblings and parents. An essential purpose of estate planning therefore is making sure your last will and testament is up to date and valid, beneficiary nominations on policies etc. are correct so that your aims will be achieved.
Provide for dependents and protect minor beneficiaries
Taking care of and protecting loved ones during your lifetime and on death is inevitably one of the chief objectives of estate planning. In addition, taking additional care that minor beneficiaries, like young children, are provided for is crucial. That may include making provision for custody and guardianship and knowing who will take care of the kids if anything happens to you (for example if both parents die jointly, you have sole custody, or are a single parent). Using testamentary trusts to avoid bequests being held by the Guardians Fund until a minor reaches the age of majority will form part of this.
Minimise taxes and costs payable by an estate
From estate duty to capital gains tax, income tax, and transfer duty – there are several taxes that are potentially payable on death. Using the tools available in a legal and compliant manner to mitigate or reduce some of these is part of any estate plan’s objectives. Then there are the costs like executor fees which are not insignificant. The bigger your estate, the more tools you may want to use, like trusts. But you need to consider the costs, flexibility and how practical it is to use some of the mechanisms and tools available.
Provide for sufficient liquidity in the estate
An essential estate planning objective is to provide liquidity on death to cater for all costs, debts and taxes payable. Executor’s fees, CGT, estate duty, debts owing – all need to be provided for. If there is not sufficient liquidity it may mean assets need to be sold to provide the necessary cash – which could leave dependents in a terrible financial situation and go against what you intended to happen. Imagine an asset like your house having to be sold (where your spouse and children are living) – to provide the liquidity needed to pay the tax and costs your estate owes?
There also needs to be cash on hand for family and dependents to survive once accounts are frozen, which happens once authorities and banks have been notified of your death. This is particularly true if you’re married in COP and everything is part of your joint estate. Only until the Masters Office has issued Letters of Executorship and the Executor is able to access any cash available in the estate – can they begin to provide for living costs etc. of your surviving spouse
Dealing with the offshore or global estate
Once you start owning assets internationally, you must consider the laws of succession/inheritance in the jurisdiction where your asset (s) are situated (SITUS TAX). Do you need a foreign will?; how does probate work in that jurisdiction?; what are the tax implications and the impact on your local estate etc? It certainly adds another layer of complexity and needs to be properly planned for and often requires specialised advice.
Business continuity and succession planning
Business owners and shareholders need to think about and plan for what will happen to their interests on death. For family-owned businesses this will mean having open and frank conversations with heirs and potential successors to try and ensure a smooth transition.
Consider the need for a living will
A living will provides instruction around what to do if you’re incapacitated, on life support and unable to communicate your wishes. It sets out your wishes for healthcare when you cannot communicate them yourself and will guide your family and healthcare professionals what they should do.
Be practical and avoid overly aggressive estate planning strategies
Pushing the envelope about what is acceptable and/or legal to avoid or minimise taxes has long been common. But the world has become smaller, and the authorities (global tax institutions) have become better at sharing information and identifying forms of tax avoidance and tax evasion. What used to be regarded as acceptable (like tax avoidance) might no longer be. Stay clear of anything that crosses that grey line and do things the correct way. Being practical and flexible also means you can make changes and amendments to your estate plan as your needs and circumstances evolve.
Estate Planning Tools
There are several estate planning tools and techniques available to use. It is therefore important that each mechanism chosen works in a co-ordinated fashion to reflect your wishes. This is where using a ‘conductor’ or ‘helicopter’ type planner (to use two different analogies) that oversees the various parts can be invaluable, particularly in more complex estates where several professionals are being used. At Henceforward that is a key part of our service proposition, particularly for Family Office clients.
Last Will and Testament
Your last will and testament is the foundation of your estate plan. As already discussed, the laws of intestate succession follow a set formula for inheritance if you die without a valid will.
As a testator or testatrix (male or female who draws up a will), your will forms the basis on how you wish your estate to be distributed on death. You may have heirs (typically family and relatives) that stand to inherit from the residue of your estate. A legatee on the other hand is simply someone you leave something specific to in your will (e.g., specific cash amount or asset) and they may not be a family member or blood relative.
It is important that an executor is appointed. If a family member that isn’t qualified to act as executor is appointed, the Master of the High Court will want confirmation from a suitably qualified person like an Accountant or Lawyer confirming they will be assisting.
Executor’s fees can be costly. They are either agreed as a fixed amount in advance and stated as such in a will, or up to 3.5% of the gross assets of the estate and 6% of income that accrues to the estate after death. (Excluding VAT). So, this is certainly something you will want to try and negotiate, particularly if your estate is large.
Making provision in your will for minor beneficiaries is critical (younger than 18). If no provision is made or you die intestate, funds on behalf of the minor will be held in the Guardians Fund, which is administered by the Master of the High Court.
To avoid this, a testamentary trust should be established which will specify the duties of the trustees, provide them with discretion on how to invest funds, when to allocate money for things like education and maintenance, and when the remaining capital should be paid out to the beneficiaries (usually once the minor reaches a certain age).
You will also want to nominate a guardian or custodian (with their agreement) to look after children in the event of events like simultaneous death of both parents, if you’re a single parent, have sole custody etc.
Most wills also have clauses to say that any heirs or legatees that inherit from your estate will have those assets excluded from the estate of their spouse.
In terms of the maintenance of surviving spouses act, if you haven’t made sufficient provision for your surviving spouse for them to maintain their standard of living, they can make a claim against your estate and thus has the potential to override what is stated in your will.
Read our article on drafting a will and what constitutes a valid will.
Use of Trusts in Estate Planning
There are various trust instruments that can be used for estate planning purposes, and used in the correct way can form a powerful and valuable estate planning tool. However, many of the loopholes and anti-avoidance measures trusts were used for historically have been closed, so if trusts are going to be used, they should be done so in a manner that is fully compliant and structured correctly. Trusts are also one of the most effective intergenerational wealth planning tools available, so used correctly and under the right circumstances, they have significant benefits.
Read our detailed guide on using discretionary trusts in estate planning.
Donations
Donating assets while you’re alive is a way of reducing the value of your estate. However, donations tax is payable at a flat rate of 20% of the value of the donation, subject to the annual R100,000 annual donations tax exemption. You must pay the donations tax by the end of the following month after the donation was made, otherwise you and the donee become jointly and severally liable for the tax payable.
Donations between spouses are however exempt from donations tax so form an effective estate planning mechanism, and donations made to charities, educational and certain other public institutions are also exempt.
Using the annual R100,000 donations tax exemption is an effective way to reduce loans accounts on trusts. The interest free or low interest loan to a trust is not seen as a donation but the Section 7C anti-avoidance measures may be incurred, and donations tax then becomes payable on the difference between the interest rate that should be charged vs the interest that was paid.
Utilising the annual R100,000 donations tax exemption can be an effective way to begin to reduce the value of your estate over time. But being aware of the tax-avoidance measures of Section 7C of the income tax act means it still requires proper planning and advice, so you do it in the correct manner.
Marital Property Regimes and Estate Planning
If you’re married in Community of Property (50/50) there is no contractual arrangement, and you can only bequeath your half of the estate. Everything you own is effectively part of the joint estate (no matter in whose name it may be registered) and that applies to assets acquired that predate the marriage.
All debts also bind the joint estate (even if incurred by one party). Estate duty is payable on the half share of the deceased estate. In most cases assets are simply bequeathed to the surviving spouse so estate duty is rolled over. Because of the nature of everything being jointly owned and on death accounts are frozen, it is particularly important to make liquidity provisions for your surviving spouse. You can donate or bequest assets to someone married in COP and stipulate that those should fall outside of the joint estate.
Marriage out of Community of Property (ANC)
An anti-nuptial contract is drawn up by an attorney and the value of each spouse’s estate at the time of marriage is noted in the contract. Married with ANC means you each continue to own and control your assets/estate through the duration of your marriage, but provision must be made for the joint expenses of maintaining a household within your means. If you want assets you acquire after marriage to also remain part of your separate estate, you need to specifically exclude the accrual system. The estate planning implications are that you both have your own separate estates and the freedom to bequeath assets as you see fit.
Married ANC with Accrual
If you get married with an anti-nuptial contract, the accrual system is automatically applied unless you specifically exclude it. The estate or spouse with the smallest growth in their estate from the date of marriage – has a 50% claim of the difference between the growth of the two estates. There are assets that may be excluded in the accrual calculation like inheritances or donations, or those specifically excluded at the outset. Donations between spouses are excluded from the accrual calculation.
This form of contract is used specifically to protect a spouse that may primarily have contributed to the running of the household and raising the children against the other spouse who may have grown the family wealth in monetary terms.
What defines a spouse and co-habitation
Cohabitation is where you’re in a committed, monogamous relationship and live together as spouses but choose not to get married. This includes same sex or heterosexual unions that are intended to be permanent. Various pieces of legislation that can impact your finances will include this definition of spouse, so if you separate or die, there may be unintended consequences if you haven’t done your estate planning correctly.
The various marital property regimes all have significant nuances and implications for your estate planning. Understanding them will help you prepare accordingly.
Life Assurance Policies
A life policy is an important tool in an estate planning context. The proceeds from the policy can be used to replace income to provide for your dependents, settle any outstanding debts like a home loan and pay all the expenses and taxes on death like CGT, estate duty, executors fees etc.
A financial planner can perform a detailed liquidity and needs analysis to calculate how much life insurance you need. One of the biggest challenges a deceased estate faces is liquidity. There may be assets but unless there is cash available to pay the taxes, fees etc., – it may force the executor to sell assets – which may be the last thing you intended and could leave your heirs in a real bind.
How you set up your life policy (e.g., whether to nominate a beneficiary) will depend on the need you’re wanting to fulfil. If it’s just to provide for liquidity, you might not nominate a beneficiary, but in most cases, you’ll nominate your spouse or children. If you nominate a minor child, you might want the proceeds held in trust for them until they reach a certain age.
Retirement Provision
All funds accumulated in your approved retirement funds (pension, provident, retirement annuity, preservation) fall outside of your estate from an estate planning perspective. If you’ve retired and are now invested in a living annuity, the same applies.
If, however, you contribute more than the permissible tax-deductible amount (disallowed contributions) to your retirement funds, those will attract estate duty on death. This loophole was closed to prevent wealthy people from adding large sums into vehicles like retirement annuities to reduce the size of their taxable estates.
Making retirement provision therefore has 3 primary benefits. 1. It allows you to build your retirement savings pot, 2 decreases your tax liability thanks to the tax deduction, 3 allows you to build an asset base outside of your estate.
Used cleverly, retirement fund assets form and important component of any estate planning arsenal. Read our comprehensive guide on retirement planning here.
Global and International Estate Planning
It is becoming increasingly common to have a global or international estate. With the R10 million annual offshore allowance, more people are diversifying their assets. If you have an international estate, the complexity of your estate planning begins to increase significantly.
As a South African tax resident, you are taxed on your worldwide estate – but factors like DTA (Double Taxation Agreements), Succession Laws, Probate etc. – all have an impact on how your foreign assets are wound up and the taxes and costs ultimately levied.
If you die with an offshore or foreign estate – whether in the form of property, shares or other investments – it will have a major bearing on your estate planning. And if you only have a domestic last will and testament, it may not be sufficient to deal with your foreign assets. This could lead to lengthy delays and complications in winding up your foreign estate, which can end up taking years to finalise.
Foreign Wills and Situs Tax
Each jurisdiction or country in which you own assets, will have their own laws of succession and regulations that govern probate. Situs tax is particularly important to be aware of if you have assets in the UK or US. If your UK estate (property or shares) is larger than £325,000, you may become subject to UK inheritance tax of 40%.
In the US, that threshold is a lot lower, and US estate taxes become applicable on US situs assets once your assets exceed $60,000 and where the tax rate is also up to 40%. So, those Amazon, Microsoft or Apple shares you own might inadvertently cause you a massive estate planning burden you hadn’t yet thought of.
In terms of the DTA between SA and the US/UK, any tax paid to the IRS or HMRC can be claimed as a credit on your SA estate duty liability so you’re not paying double tax. But it still means you pay 40% in estate tax, instead of 20%.
It’s your executor’s responsibility to claim the credit and manage the process, so they need to be informed of all your assets, domestic and global.
Having separate wills for each jurisdiction may be valuable, because it allows for the simultaneous winding up of your domestic and foreign assets (probate) and should ensure that the will you have drafted is drafted correctly according to the laws that govern a particular country or jurisdiction.
That’s why receiving specialised advice becomes particularly important, because the stipulations of one will shouldn’t override the other and should always be framed by your broader wishes. There are also ways to structure your offshore investments that mitigate the need for a foreign will or having to go through probate where those assets are held. Talk to us if you would like to know more.
Pro Tip:
Business Succession Planning
What to do with your shares or interests in a business is an important part of any comprehensive estate planning process. Who will succeed you? Who will purchase your shares? Should the business be sold? Who has rights to the income generated from the business? These are all questions that need to be considered and addressed.
Your shareholders agreement (or equivalent) should include a clause about the future ownership of the business. Will the other shareholders have first right of refusal to purchase your shares – or will your heirs sell the shares they inherit for example?
Often, a buy and sell agreement is entered into which is binding on the death of a shareholder/business partner and allows the remaining shareholders to purchase your shares on death. That may mean purchasing a buy and sell life insurance policy on each partners life so that you have the cash to buy the shares from the deceased estate. It is important that this is structured correctly so that the value of the insurance is exempt from estate duty.
You will need to value the business on a regular basis (usually after the annual financials have been completed) to determine a fair value, which may also include conversations around the value of goodwill, fixed assets and intellectual property provided.
Estate planning with a family-owned businesses can make this process especially complex because there are other dynamics to consider within a family context. Managing this inter-generational transfer of wealth and all the responsibilities it entails is often not easy.
Estate Planning and Taxes
Estate duty of 20% is payable on the first R30 million of your dutiable world-wide estate on death and 25% on the value above that. Property and deemed property are included in the value (certain insurance policies), from which various allowable deductions are permitted which includes various costs, debts, taxes, property that accrues to your surviving spouse etc.
There is a R3.5 million abatement that is applied (which can be rolled over to the surviving spouse), so effectively an estate valued at under R3.5 million will be estate duty exempt.
People often forget that death also incurs CGT and that outstanding income taxes need to be settled. Death is a deemed disposal from a CGT perspective, so in addition to estate duty, provision needs to be made for CGT when making liquidity calculations. The annual exclusion on death for CGT purposes is however increased to R300,000 (from the usual R40,000).
For a primary residence, the first R2 million gain is also excluded.
Minimising estate duty and other associated taxes where possible will form part of any estate planning exercise. Using donations, rollovers, trusts and the like all form part of the toolkit available. That’s why formulating a comprehensive estate plan is an important exercise everyone should go through.
Conclusion
We hope that Estate Planning 101 the ultimate guide provides you with a comprehensive framework and resource to use when formulating your estate plan. For a more detailed and personalised discussion, you are welcome to contact us for further information. And to find out more about Henceforward’s Wealth Management Services by visiting our home page.
Carl-Peter Lehmann
Carl-Peter is a Director and Partner at Henceforward. He is a Certified Financial Planner and has spent more than 20 years helping people achieve their financial, investment and lifestyle goals. His particular area of specialism has been offshore investing and making sure his clients have their investments well structured from an estate planning perspective.
