Protecting family in the case of death should be a financial priority. Not having your financial affairs in order can create a nightmare for loved ones.
Although estate planning can be complicated, Marteen Michau, head of tax and fiduciary services at RMB Private Bank, says there are four key legal documents you need in place:
The will
A will stipulates what happens to your assets when you die. What many people do not realise is that it needs to be updated every two years.
Michau says legislation, which could have a material impact on your estate, changes each year. Personal circumstances also change through death, divorce and birth, as well as asset accumulation.
Every two years you need to assess whether your legal will still reflects your personal will and takes into account any changes in legislation.
Your will must stipulate the name of the guardian of your children. When selecting a guardian, Michau recommends that you first discuss it with the person to ensure that he or she is comfortable with the decision.
You should also name a second guardian in case your first choice is unable to care for the children when you die.
Michau says it is important for spouses or partners to have two separate wills rather than one joint will. When the first spouse dies the will is lodged with the master of the courts. If the second spouse dies without making a new will and the master’s copy is lost (which is not unusual), the spouse dies intestate.
If you have offshore assets, Michau advises that you have a separate will drawn up by a legal firm in that country. The foreign court might not understand the South African legal terminology and there might be local inheritance laws that conflict with your wishes.
The testamentary trust
This trust becomes effective on your death and is usually used to protect the assets you leave your young children. Without a will or trust, if you have minor children, your assets are paid to the guardian fund. This is a government-managed fund that pays a nominal interest rate once a year.
Michau says it is virtually impossible to access these funds before the child or children turn 18, which means that any guardian you have elected to take care of your children will have no funds for education and general welfare.
When appointing a trustee it is worth spending time and money to find the right person or company. Your children’s assets are in their hands. Don’t create shortcuts to save a few rands.
Trustees carry an enormous responsibility. The right trustee can ensure the financial security of your children and prevent money from disappearing through poor investment decisions.
Even if you leave all your assets to your spouse, you can allocate R3,5-million to the testamentary trust. These funds will not form part of your spouse’s estate on his or her death and can be paid to the children without their having to pay the current 20% estate duty.
Living will
This stipulates what should happen to you if you are kept alive by life support. A living will enables you to leave instructions to have yourself taken off life support; you can also donate your organs. Michau says this inclusion helps your family to make difficult decisions and removes the guilt of having to make such choices.
Letter of wishes
The letter provides a guideline of your wishes to the guardian of your children.
Michau recommends that you define the age at which your children inherit the funds. Recent changes to legislation reduced the age of majority to 18.
You might want to keep the assets in the trust until your children are older. The letter can include what you wish the funds to be used for, such as education, travel, food and so on
Life policy payouts will soon be tax-free.
A life policy is an ideal vehicle to ensure that your dependants receive funds to continue living on immediately, rather than waiting for the estate to be wound up, which could take many months.
Draft legislation has been proposed in which proceeds from life policies are to be excluded from estate duty.
The legislation is expected to be passed in January 2009. If you are leaving your life policy benefits to dependants who are younger than 18 years old, Marteen Michau advises nominating the trust as the beneficiary so that the funds do not go to the guardian fund.