| This is a single blog of the 3 posts that were published on Moneyweb (and picked up by the Citizen newspaper) on Wills and Estates. If you’d like a copy of the Will checklist (or Redfile template), kindly send us an email. Why You Need a Will At this time of the year, I get a flurry of enquiries from my clients checking up on their Will – probably because they are travelling and there is an increased risk of an event, or maybe they are just tidying things up before the year-end. I have a holistic approach to my practice and often one of my first questions is – here is your Will? And please send me a copy. For those of you who aren’t my clients, I have put together a (free) Will checklist that you just have to email me for, that will cover the broad issues and identify whether you need to get a professional to have a look am going to be going into this checklist and some of the pitfalls so you can at least know where you stand. If you don’t have a Will then the ‘intestate laws of succession’ will apply and could be far removed from your wishes. In South Africa, Wills do not to have to be ‘lodged’, ‘certified’ or ‘notarised, but this is not necessarily true of your offshore assets. In the Channel Isles for example, (a big favourite of RSA LISPs), you have to have a separate Will for that location and appoint a probate officer (at additional expense). The worry about the cost of drawing up a Will often leads South Africans to go for a bank or other institution’s ‘free’ Will – or even worse, download a template from the internet. You know that there’s never a ‘free lunch’ right? Those financial institutions have a very important caveat for doing that ‘Free Will’ – they insist on being the Executor. Those internet templates? If you go through the checklist (and follow this blog and podcast series) you’ll see exactly what those pitfalls are. If you really can’t spare the R1000 odd to get a properly structured Will where an institution is not the executor – guess where you can get a decent template, change the executor and make the previous Will null and void? (Remember to cancel the bank’s ‘safekeeping’ fee too). One other little hustle going on out there that I am not a fan of, is a financial institution not only giving you a ‘free’ Will, making themselves the executor, but to add insult to injury, persuading you to take out a life policy to pay their executors fees, and estate duty too if they can. The irony is that this policy too is estate dutiable. The choice of Executor is very important. The maximum fee allowed by an executor is 3.99% plus VAT. If you appoint an institution, you will have given away any ability to negotiate that fee. I am a great believer in win-win. It is a lot of work to be an executor, and they deserve to be compensated. In a small estate, 3.99% is probably fair, on a large, well-organized estate where the fee can run into hundreds of thousands or millions of rand, it just isn’t. Just because you nominate an executor, don’t assume that the Master will accept them, especially if they are unqualified and inexperienced. My preference is to make the surviving spouse the executor but make them fully aware of what they need to do in the case of a death. I include ’notes to the executor’ in my Wills so that they know what to do. Those of you who have been following my blogs are probably already familiar with my RedFile organisational template (free on request) where copies of the Will are found right on top. The last thing your loved ones want to do while they are grieving is having to go through mountains of files and paperwork looking for a Will. If your advisor has done a financial and estate plan with you, then he or she will be able to help negotiate a reasonable fee with the executor. Double-check for correctness of the spelling of names and ID numbers in the Will. On the death of a person, IDs and banking details etc are submitted to the executor and you don’t want something as silly as this derailing the process. This includes company registration numbers, Trust numbers and Charity registration numbers. Once you’ve drawn up a new Will – what should you do with the old one? To start with, dating the Will is extremely important. One of the first clauses in the new Will should cancel any old Will – but you need to go further than this. My preference is for the old Will to be destroyed, or at the very least defaced in such a way that it is clear to anyone that the Will has been cancelled. (I had some personal experience with this 20 years ago – when my mother died, and I went to the lawyer’s office to find her Will – the secretary brought out the old one. TG I had seen the new one, this old one had been done when my mother was unwell and by some other lawyer not familiar with the situation. Needless to say, I was not very happy!) If you really must have a memento of the old one, scan-in a digital copy (with clear cancellation marks) and destroy the original. The Beneficiaries are probably all we really think about when it comes to the Will, and can I just give you one piece of advice upfront – don’t try and rule from the grave. Put safeguards in place for minors and truly irresponsible adults but then let the Trustees manage it with their discretion. Your primary consideration should be your spouse, financial dependents and minor children. You can theoretically cut them out of your Will, but if there is financial dependence they can take this to court. Laws around your marital regime, especially Community of Property and ANC with accrual, will also automatically allocate the other parties’ share of the estate to them whether you like it or not. While we’re talking about marital dysfunction. If you get divorced, you have 3 months to change your Will and beneficiaries or the divorced spouse will prevail. Remember that anything left to a spouse is estate duty free (in terms of section 4q of the Estate Duty Act – I will be going into estate duty in the next section).. In your Will, you should also put in alternate beneficiaries should you die at the same time or within 3 months of each other. It is often a good idea that a clause similar to the following be used: ‘estate is to be divided among their descendants in equal shares per stirpes’. (This means that if a beneficiary is no longer alive, then their proceeds will be disbursed according to this principle. If you don’t do this, then his or her share will go back into the pot to be divvied up between the other, surviving, descendants – potentially cutting grandchildren out of the estate.) 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). The proceeds count toward the estate duty calculation, but the beneficiary is paid directly. If this bequest triggers estate duty the executor can go after them for SARS’s piece. Retirement funds (RAs, Pension funds, Provident funds) have nominees not beneficiaries – and Trustees will first look at dependents’ needs before allowing the funds to be paid out to non-dependents. Be aware, this can take as long as a year.  Some of the nuances of a Will that are still important Your spouse gets preferential treatment 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 CGT (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). 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. Debt and insolvent estates One of the biggest concerns in an estate, especially if someone dies long before they are expected, is the debt burden (and, of course, the potential liability of minor children – which if they are Gen Zs could extend until age 40). Life insurance is an obvious solution to this and you can bring down that cost by ‘terming the policy’ – making it for the length of the debt – say 20 years for a bond, or until the child turns 21, even on a declining capital payout (because the debt burden decreases every year). This ‘structure’ brings down the premium (and also the broker’s commission, so if they’re not keen – that’s why). Complicated families Blended families are far more common today than in the past – and often makes the drawing up of the Will more difficult and contentious – especially if it’s a case of Yours, Mine and Ours. When family dynamics are complicated – don’t have a joint will (I reserve these for spouses who have no children, or only children from that union). How to split your assets is going to require an in-depth discussion with your spouse, and perhaps the best way to handle it is through a Trust (Testamentary or Intervivos). Should you discuss the terms of the Will with your children? If your family is uncomplicated, then by all means, 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 family I strongly recommend speaking to your financial advisor about using a Trust, either inter vivos or mortis causa, or perhaps some form of a usufruct – to provide for your surviving spouse while they are alive and distribute the proceeds to your various progeny thereafter. Loans and the collations clause You might have noticed that your Will has this “collation clause” which essentially forgives and debt or loan given to a beneficiary during your lifetime. It is normal in a South African to state that collation will not apply (because if it does, then the value of the ‘loan’ is added back to the value of the estate and could increase the amount of estate duty paid.) This gets 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 score’ for the others, you can do this in the Will – but PLEASE get legal advice. Your beneficiary’s marital and insolvency status. Why should you care how your beneficiaries are married? If they have unwittingly, (because if anyone really knew the implications of Community of Property (COP) they wouldn’t be a cheapskate and forgo the Ante Nuptial Contract (ANC)) and get married in COP and you do not specifically state that the proceeds may NOT fall into the marital estate, then the spouse of said beneficiary has just been given a nice 50% gift on their death or divorce (and potentially all of it should the other spouse be sequestrated). 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 (or if they are not responsible, for life).  Estate planning – why do you need it Before you get around to the fun part of the Will-pdeciding who get’s what – perhaps you need an estate plan. If you have a professional advisor, they have probably done a financial plan and even a retirement plan – but is an estate plan really necessary – especially if your anticipated expiry date is decades away? Ironically there are plenty of early decisions you can make concerning your estate that can make a difference – specifically using Trusts. Estate plans are especially important if you are an entrepreneur and are going to be building a business. Starting a Trust early (although it comes with setup and ongoing costs) can protect your assets (and your family) from creditors. Estate Duty and Donations Tax There are investments that are estate-duty free (and protected from creditors) – formal pension investments (RAs, Pensions, Provident funds and their preservers and Living Annuities. They are also not included in the estate for executor fee calculations. Life insurance policies do form part of the estate but are not included in executor fee calculations. Assets held in a Trust, of course, are not yours, but if you have a loan account then the value of that will be added to the estate. (Loan accounts are used to ‘move’ assets into a Trust over time without incurring donations tax – but remember that SARS have pounced on this ‘loophole’ and the Trust has to pay you interest at the going rate (which will be taxed as income in your hands) or it will be deemed a donation (20% donations tax). This is a good reason to start a Trust early if you’re an entrepreneur before you have to worry about loan accounts. There is a good reason estate duty and donations tax are the same in RSA – 20%, this is a loophole plugged by SARS long ago to prevent pre-inheritance to avoid estate duty. You can use this to your advantage though, you can leave your (after estate duty) assets to a Trust and it will not go into a loan account, but directly into the Trust. Loan accounts on your death, once estate duty has been taken care of, will also move directly into the Trust – and that’ll be the last time they are subject to estate duty (unless the Trust is dissolved somewhere down the line and the proceeds go into an individual’s personal estate). Pros and Cons of a Trust There are basically two types of trust, an inter vivos trust – set up while you’re alive, and a trust mortis causa or testamentary trust set up after your death and triggered by your Will. The biggest difference between the two is that a Testamentary Trust is NOT designed to live forever. The Davis Commission and other government interventions have made it more and more onerous and expensive to own a Trust, so if you’re going down this route, discuss it with your financial planner who has no long-term vested interest in the Trust. There are way too many ‘Trust Brokers’ out there who will suggest multiple, complicated cascading Trusts, each with their own financials and ongoing expenses (which they often will do for a fee). A single uncomplicated Trust is often quite adequate. Set-up costs for a simple Trust run at around R15k, and I have seen complicated cascading Trusts cost as much as R500k to set up. Keep it Simple Stupid. More regulations are probably coming down the pipe, and SARS is employing the cream of the crop graduates to close every loophole they come across. The more sophisticated and juicy the set up looks – especially when it comes to tax, the more skeptical you need to be. If you’re married in Community of Property and either of you is an entrepreneur, then the only way to protect the other spouse from potential creditors is with a Trust (or divorce and an ANC). Let’s face it, entrepreneurs often fail several times before finally making it and it’s just not fair to bankrupt the family every time. Even with the costs, if a Trust makes sense for the long-term plans of the estate then it might be worthwhile opening it, running it on fumes, until the big payday of (unfortunately) your demise. Why an estate plan? An estate plan sounds very fancy – but it really doesn’t need to be. It can be a simple proforma liquidity calculation and Liquidation and Distribution report (L&D report) which is the final calculation an executor will do when winding up an estate. A Liquidity calculation will simply work out if there is enough ‘cash’ in the estate to settle the costs. If there is not enough liquidity (say from bank accounts or flexible investments) then the executor will have to make some decisions, potentially to declare the estate insolvent and get a trustee involved who will sell off assets to ‘create’ liquidity and pay off creditors, including SARS. This simple liquidity calculation can save your beneficiaries from considerable angst – and provisions or policies can be put in place to create that ‘instant’ liquidity. If you have a spouse and minors, then it is important that they also have instant liquidity to keep the family afloat while life insurance policies payout, and the estate winds up. Life policies usually pay out quickly – but don’t bank on it. Incompetence in “the nature of the death” description (wrongly citing the death as a suicide, homicide or ‘undetermined’) can delay a payout for years. Pension funds can take a year. Without boring you with the details, the L&D gives an inventory of assets (property, deemed property, life insurance proceeds, investments etc) and liabilities. It also lists all costs associated with winding up of the estate (including the final income tax bill), and the estate duty and includes proof that all the costs have been paid and debts settled. The report will then detail the proceeds to each beneficiary – and once this has been done, the proof of payment etc will be included and everything will be submitted to the Master for finalisation. Articles and Blogs: Wealth creation is a balancing act over time NEW Wealth traps waiting for unsuspecting entrepreneurs Two Pot pension system demystified Keeping your legacy shining bright Financial well-being when dealing with Dementia and Alzheimers Weathering the storm Pruning your wealth farm Should you change your investments with changing politics? Taking a holistic view of your wealth Why do I need a financial advisor? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion 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 |