Most people I have met have a love/hate relationship with life policies (dread disease and disability policies fall under the same general term – ‘life policy’), but having been in the profession a while, I have seen the impact they can make when the unexpected happens. I am not going to go into that can of worms right now, save to say that they have important implications for your estate and your legacy.
Life policies: Remember that life insurance policies are a contract between you and the insurance company and bypass the Will (unless the beneficiaries on the policies are no longer alive). In my opinion, do not put ‘the estate’ or ‘in terms of my Will’ in as beneficiaries of the life policies; this will immediately and unnecessarily attract executor’s fees. It will also make the funds available to creditors. If you have been sold a policy “to pay for executors’ fees” and it goes to that FSP’s account (where they will magnanimously give you anything that is left), then you’ve just given them an extra 3.99% in fees and made sure they get paid first – not your beneficiaries! While you’re at it, check if your broker who sold you that policy is getting any kickback on the executor’s fees (in addition to their commission).
Proceeds of a life policy are estate-dutiable. If this bequest from a life policy triggers estate duty (in other words, it is not going to a spouse), then SARS may come after them for a share of the estate duty (above the threshold). The executor may ask for it first, but if that fails, SARS will come to collect the debt. If you are ever the beneficiary of a life policy and you are not the spouse, find out from the executor if estate duty is payable before you ‘spend’ it. Keep this in mind when you nominate beneficiaries.
Retirement funds (RAs, Pension funds, Provident funds) are estate duty free, BUT have nominees, not beneficiaries, and the Trustees of the fund will first look at dependents’ needs before allowing the funds to be paid out to non-dependents. In other words, you can’t cut out an irresponsible dependent from these funds – you can in the rest of your estate. It can take as long as a year to get a retirement fund payout and can’t be relied on for ‘quick’ liquidity. There are also tax implications for the beneficiaries, so the executor needs to ensure they get proper financial advice.
Your spouse: It’s important to understand that your ‘spouse’ gets preferential treatment when it comes to estate duty (proof is required for non-civil unions).
In terms of Section 4(q) of the Estate Duty Act 45 of 1955, any asset left to a spouse does not attract estate duty, and such assets do not trigger Capital Gains Tax (they transfer at ‘base cost’). The R3.5m abatement (an allowance essentially which you can deduct from the estate value before estate duty is applied), if not used for third parties, will also roll over to the surviving spouse (making it up to R7m). Any asset not left to a spouse will attract estate duty (once it’s over the R3.5m abatement). Your Planner will be able to tell you the pros and cons of whether to leave life-insurance policies to beneficiaries directly and/or to put them in the Will (estate duty implications).
Although Estate duty will not apply to the spouse’s share of the estate, all the other costs still do, including settling of debt, executor’s fees, income tax, etc. The 4q calculation comes after all of that. It’s also important to note that if a beneficiary dies soon after receiving the inheritance, new estate duty will still apply to the second death. Some of this can be mitigated with Trusts, 3-month survivor clauses or usufruct clauses.
Property: You may not know this, but there is no transfer duty payable when a property moves from an estate to a beneficiary (conveyancing and other fees may apply), so there is no point in transferring it before death, and donations tax will also apply. You can insist that the estate liquidate the property to stop a bun-fight between siblings.
Complicated families: Blended families are far more common today than in the past and often make the drawing up of the Will more difficult and contentious, especially if it’s a case of progeny when it’s “Yours, Mine and Ours”. How to split your assets will require an in-depth, possibly contentious, discussion with your spouse, and perhaps the best way to handle it is through a Trust (Testamentary or Inter vivos). Again, time to bring in a professional Planner. If you’re married in COP, although the estate is joined, the Will only governs 50 % of the estate; the other 50% belongs to the surviving spouse. If the spouse does not leave their share to the surviving spouse and large assets, such as property, are involved, it can get very messy.
I am often asked: “Should I discuss the terms of the Will with my children?” If your family is uncomplicated, then by all means discuss it with them (as my mother did with me, thank goodness), but if there are half-siblings, step-siblings, several different spouses, including the current one, then I don’t recommend it. There is going to be enough of a bun fight when you die, without starting a feud right now. If you have a complicated situationship, I strongly recommend speaking to your financial advisor about using a Trust, either inter vivos or mortis causa/testamentary, or perhaps some form of usufruct, to provide for your surviving spouse while they are alive and to distribute the proceeds to your various progeny thereafter.
Loans and the collations clause: You might have noticed that your Will has this “No Collation Clause” which essentially means that any loan or asset given to a beneficiary during your lifetime is not ‘called in’ by the estate BUT it can be added back into the estate for Estate Duty purposes (if it falls outside the annual donations limit and donations tax was not paid on it.) We are now getting into the murky area of ‘pre-inheritance’ and ‘donations tax’, and you really need to get professional advice. If you’ve given a large loan/gift to one beneficiary and want to ‘even the field’ for the others, you can do this in the Will – but PLEASE get professional advice.
Why does your beneficiary’s marital and insolvency status matter in a Will? There is a good reason the Community of Property (COP) marital regime is not a great idea. Sure, it protects the stay-at-home partner in the traditional sense, but remember, it is the community of property AND loss. In a COP, if one spouse is declared bankrupt, the other spouse’s assets (and creditworthiness) are also lost. If you are a married COP, left it too long to undo, and are a business owner where bankruptcy is possible (often through no fault of your own), then a Trust is a good alternative for family assets. Don’t be a cheapskate and forgo the Ante Nuptial Contract (ANC) – steal from the wedding budget if you have to. In a Will, if you do not specifically state that the proceeds may NOT fall into the marital estate, then the spouse of a beneficiary (that toxic Brother-in-law) has just been given a nice 50% gift on the beneficiary’s death or divorce (and potentially all of it should the other spouse be sequestrated and they are in COP). It can also cause problems with ANC. This is just one line but leaving it out can cause untold angst. If one of the beneficiaries is, or could be, insolvent, it is prudent to add an insolvency clause too, so that the proceeds do not go into their estate but can, for example, be left to a Trust until such beneficiary is rehabilitated, so the proceeds can’t be taken by Creditors.
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Cobie Legrange and Dawn Ridler,
Rexsolom Invest, Licensed FSP 45521.
Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za
Website: rexsolom.co.za, wealthecology.co.za