Last Updated on 23/01/2024 by Carl-Peter Lehmann
Estate Planning 101 is your essential guide to navigating the complexities of estate planning. This guide delves into the myriad of tools at your disposal, aiming to enhance and optimize your strategy. From the fundamentals of crafting a will to the intricate use of trusts, donations, understanding marital property regimes, and managing international assets, we’ve got you covered. Moreover, we’ll shed light on the tax implications that play a crucial role in shaping your estate plan.
Often overshadowed within the broader spectrum of financial planning, estate planning is a critical, yet frequently overlooked aspect. The thought of planning for life’s eventualities can be daunting and uncomfortable. However, for those with dependents, it’s an indispensable part of a comprehensive financial strategy.
Neglecting this vital planning can have dire consequences. Without it, your assets may not be distributed according to your wishes, leaving your loved ones in a precarious financial position. To get a grasp of the fundamental concepts, check out our concise video below. But remember, for a thorough understanding, reading the full article is key.
Table of Contents
Estate Planning Process: A Comprehensive Approach
Think of your estate as the collection of assets and liabilities you accumulate throughout your life and what remains when you pass. Estate planning is a comprehensive process that intertwines your financial, psychological, and economic circumstances, ensuring your goals for your estate, both during your life and after you’re gone, are achieved.
In simpler terms, estate planning ensures the effective and desired distribution of your estate to your heirs according to your wishes. It’s not a one-time task but an evolving process, adapting as your assets and desires change.
The Basics of Estate Planning
Initiating your estate planning journey involves cataloging your assets and liabilities—understanding what you own and owe is the starting point. The subsequent steps involve setting clear objectives for distributing your estate. This includes making decisive choices about who inherits what, when, and how. Whether your plan is as straightforward as leaving everything to your spouse or as intricate as orchestrating the transfer of wealth across generations, clarity is crucial.
The magnitude and intricacy of your estate typically dictate the level of detail and time invested in the planning process. It’s a sad truth that larger estates often breed disputes among family members and heirs over entitlements. This reality underscores the importance of meticulous planning.
Recognize that every financial decision you make influences your estate planning. This encompasses a wide array of considerations, from maintaining an up-to-date will (when was the last time you reviewed yours?) to how you manage your investments, outstanding debts, policy beneficiaries, retirement savings, and even international investments.
Grasping the essence of estate planning means acknowledging that no financial decision exists in isolation. The earlier you start shaping your plan, the more peace of mind you’ll secure, ensuring that your loved ones are well cared for, come what may.
Estate and Financial Planning: Two Sides of the Same Coin
Estate and financial planning are intrinsically linked, operating in tandem. It’s a common misconception that estate planning is exclusive to the ‘older’ demographic or the affluent. In reality, the moment you begin to accumulate assets (and liabilities), regardless of your age, it’s crucial to integrate estate planning into your broader financial strategy.
The journey often starts simply, perhaps by appointing a beneficiary or drafting a will. However, as life unfolds—be it through new relationships, having children, or other significant life events—your estate planning needs become more intricate and demand adaptation.
The support network for your estate planning isn’t fixed. Initially, your financial planner might handle the essentials, like creating a will or conducting liquidity assessments. As your assets grow and your financial landscape becomes more complex, the circle widens to include lawyers, tax consultants, and other specialists.
Similar to the broader concept of financial planning, estate planning is not a one-off exercise. It’s a dynamic component of your overall financial health, requiring regular review and adjustment to remain aligned with your evolving life circumstances and goals.
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.
Navigating Estate Planning Tools
Understanding and coordinating the array of estate planning tools is crucial, especially in complex estates involving multiple professionals. As a ‘conductor’ or ‘helicopter’ planner, Henceforward excels in orchestrating these components, particularly for Family Office clients.
The Cornerstone: Last Will and Testament
- Your last will and testament lay the groundwork for your estate distribution, safeguarding your wishes against the default intestate succession laws.
- It’s essential to appoint a qualified executor to manage your estate, noting that executor’s fees can be substantial. For minor beneficiaries, establishing a testamentary trust is key to managing their inheritance effectively, thus avoiding the Guardians Fund. Additionally, nominating a guardian for your children (minor) in certain scenarios is a vital consideration.
Most wills include provisions to protect inheritances from merging with the spouses’ estates of heirs or legatees. However, it’s important to remember that the Maintenance of Surviving Spouses Act may allow a surviving spouse to claim against the estate if insufficient provision is made.
Further Reading: For a deeper dive into creating a valid will, read our comprehensive article.
Use of Trusts in Estate Planning
- Trusts, when structured compliantly and correctly, are potent tools for estate and intergenerational wealth planning, despite the closure of historical loopholes and anti-avoidance measures.
Further Reading: Explore the nuances of using family discretionary trusts in estate planning in our detailed guide
Donations
- Donating assets can reduce your estate’s value, but it’s crucial to understand the implications of donations tax and the potential benefits of the R100,000 annual exemption.
- Spousal donations and those to specific organizations are typically exempt.
- However, navigating the nuances of Section 7C is essential to ensure compliance and effective estate reduction over time. Proper planning and advice are paramount to maximize the benefits of donations within the legal framework.
Incorporating Marital Property Regimes into Estate Planning
Understanding the nuances of marital property regimes is crucial for effective estate planning, as each regime presents distinct implications for asset distribution and control.
Community of Property (50/50)
Under an ANC, drafted by an attorney, each spouse maintains separate control over their assets, with the initial value of each estate noted at marriage. This regime requires careful planning for joint household expenses. Assets acquired after marriage can be kept separate by excluding the accrual system, allowing for independent estate planning and asset bequeathal.
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.
ANC with Accrual
Defaulting to the accrual system unless expressly excluded, this regime ensures the spouse with lesser estate growth gains a claim to half the difference in growth between the two estates. Certain assets, like inheritances or specific exclusions, are exempt from the accrual calculation. This regime aims to protect spouses contributing in non-monetary ways, like home management or childcare, ensuring equitable distribution.
Cohabitation and Spousal Definition
Cohabitation—living together in a committed, monogamous relationship without formal marriage—affects estate planning due to varying legal definitions of a spouse. This includes both heterosexual and same-sex unions intended to be permanent. Failure to account for this in estate planning can lead to unintended consequences in case of separation or death.
Each marital regime introduces specific considerations into your estate plan, making a thorough understanding of these nuances imperative for tailored and effective planning.
Life Assurance and Retirement Planning in Estate Management
Life insurance is a pivotal component of estate planning, serving as a financial safeguard for dependents, covering debts, and addressing estate-related expenses like CGT, estate duty, and executor fees. A financial planner can conduct a thorough analysis to ascertain the requisite coverage, mitigating the liquidity challenges estates often face. Structuring your life policy, including beneficiary nominations, should align with your specific objectives, whether it’s ensuring liquidity or providing for dependents, possibly through a trust arrangement for minors.
Retirement Provision
Assets in approved retirement funds are generally excluded from your estate, offering a strategic avenue for asset accumulation while reducing tax liabilities and building wealth outside of your taxable estate. However, contributions beyond tax-deductible limits may attract estate duty. Retirement provisions, therefore, not only bolster your retirement savings but also play a strategic role in estate planning.
Further Reading: For a detailed exploration of retirement planning, consider reviewing our comprehensive guide.
Global and International Estate Planning Considerations
Owning assets internationally adds a layer of complexity to estate planning. As a South African tax resident with a global estate, you must navigate the intricacies of DTA, succession laws, and probate, which influence the settlement of foreign assets and the associated taxes and costs.
Assets in jurisdictions like the UK or US can significantly impact your estate planning, particularly due to Situs tax implications. Understanding the thresholds for inheritance/estate tax in these countries and the ramifications of owning assets like shares in major corporations is critical. While DTAs provide relief against double taxation, they don’t alleviate the high tax rates.
Having informed executors and possibly separate wills for each jurisdiction can streamline the process, ensuring your global assets are managed effectively and in accordance with your broader wishes. Specialized advice is indispensable for navigating these complexities and aligning your global estate with your overall estate plan.
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Strategizing Business Succession in Estate Planning
Addressing the future of your business interests is a critical facet of estate planning. Key decisions include identifying successors, determining the fate of your shares, and resolving the distribution of business-generated income.
A robust shareholders’ agreement should outline the protocol for future ownership. Considerations include whether other shareholders get a preferential option to buy your shares, or if your heirs are expected to sell the inherited shares.
A common approach involves a buy-sell agreement, activated upon a shareholder’s passing, allowing the remaining partners to buy the deceased’s shares. Funding this transaction often involves a life insurance policy on each partner, structured to exempt the payout from estate duty.
Regular business valuations are essential, particularly after finalizing annual financial statements, to ascertain a fair value. These evaluations should account for various factors, including goodwill, fixed assets, and intellectual property.
Family-owned businesses introduce additional complexity into estate planning due to the intricate family dynamics and the challenges of managing intergenerational wealth transfer. Navigating these nuances requires careful planning and, often, specialized guidance.
Estate Planning 101: Navigating Taxes and Duties
- Understanding and planning for the tax implications of estate duty is paramount in estate planning. Estate duty is levied at 20% on the first R30 million of your worldwide estate at death, increasing to 25% for amounts exceeding that.
- The duty encompasses property and certain insurances, offset by allowable deductions like costs, debts, taxes, and assets passed to your surviving spouse.
- A R3.5 million abatement, transferable to a surviving spouse, effectively exempts estates under this threshold from estate duty.
- However, it’s crucial not to overlook other tax obligations at death. Capital Gains Tax (CGT) is a significant consideration, as death triggers a ‘deemed disposal’ for CGT purposes.
- While there’s a R300,000 annual exclusion at death (higher than the standard R40,000), and a R2 million exclusion on gains from a primary residence, careful planning is still required to manage the potential CGT impact.
Strategically minimizing estate duty and other taxes is a critical element of estate planning. Employing strategies like donations, rollovers, and trusts can mitigate tax burdens. Crafting a comprehensive estate plan, considering all tax implications, is an essential step for everyone, ensuring your estate is managed and transferred according to your wishes, efficiently and effectively.
Conclusion
In conclusion, estate planning is a comprehensive and dynamic process, crucial for safeguarding your legacy and ensuring your wishes are honored. From understanding marital regimes to effectively utilizing tools like life insurance, trusts, and understanding the nuances of business succession, each aspect plays a pivotal role in crafting a robust estate plan. Navigating the intricacies of taxes, such as estate duty and CGT, further underscores the importance of meticulous planning. Engaging in this process not only secures your financial legacy but also provides peace of mind, knowing that your loved ones are cared for and your assets are managed according to your wishes, now and in the future.
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.
