Higher-income earners should review their estate plans frequently to optimise tax liabilities, minimise costs and maximise administrative efficiencies under changing local and international regulatory environments.
Tony Barrett, head of wealth management at Barnard Jacobs Mellet Private Client Services, believes South Africa’s recent “exchange control liberalisation” is one event that triggers an estate planning rethink. “Offshore trusts, wills and structures may require simplification or consolidation to save costs and remove duplication,” says Barrett.
Tiny Carroll, estate planner at Glacier by Sanlam, says another development to take note of is “the unprecedented scrutiny of trusts by creditors, disgruntled spouses and tax authorities”. Financial planners must ensure stringent trust administration processes are in place to avoid legal contraventions when trusts are set up. Your trust must stand up to the most rigorous inspection.
Peter Rigby, executive wealth manager at Alexander Forbes Financial Planning Consultants, says: “Readers must understand that the structuring of the trust, the trust deed and influence you have over the assets of the trust are critical.” As soon as the taxman determines your trust to be “an extension of your ego” he will ignore the trust for estate duty purposes.
The big shift in estate planning thinking is because of changes introduced by the Taxation Laws Amendment Bill of 2009. The Bill — among other proposals — introduced a simpler method to administer the R3,5-million (an individual) estate duty abatement for spouses. In simple terms, your surviving spouse will calculate estate duty using a combined R7-million abatement. “With R7-million in estate duty abatements available to your spouse, the need for complex arrangements across various entities and parties may fall away, creating opportunities for simplification and savings,” says Barrett.
The final Bill included a number of improvements over the proposed Bill — at the industry’s request. The most important of these is that your surviving spouse no longer has to inherit your entire estate to qualify for the larger abatement. The effective date for this provision will be the death of the second spouse and not the first. Niel Raubenheimer, taxation committee head at the Fiduciary Institute of South Africa, says they “welcome treasury’s willingness to incorporate industry feedback”. He notes, for example, that few individuals have simple estates where assets are solely transferred to the surviving spouse.
Anti-avoidance provisions dealing with usufruct were also dropped from the final Bill. A usufruct is an arrangement whereby you avoid estate duty by conferring “right of use” (rather than ownership) over one or more of your estate assets to your surviving spouse. These assets are first housed in a one-year trust before being transferred to the ultimate heir. But estate planners warn of a possible clampdown on usu-fructs in estate planning some time in the future.
You should also structure your estate plan to benefit from the removal of retirement funding structures from the tax net. Assets held in pension, provident and preservation funds, as well as retirement annuities and living annuities, no longer attract estate duty or executor’s fees. Although not a new development, many individuals still have to adapt their retirement and estate plans. The decision on how much to remove from retirement funding structures at your death is more critical than ever before. Estate planners have to balance the short-term requirements of your beneficiaries with their long-term requirement for income. And that’s not always an easy task.
The overriding trend in estate planning is towards simplicity. Carroll says today’s estate planner must focus on “ensuring that all the instruments in the estate are aligned”. The Holy Grail of estate planning is to eradicate conflicts between your will, matrimonial property, policy and retirement fund benefits, trust instruments and so-called buy-and-sell arrangements, while at the same time providing for tax and estate duty by way of liquidity in the estate.
This has to be done with due consideration for all elements of your financial plan.
“To optimise efficiencies and create appropriate arrangements in today’s economic climate it is necessary to take a much broader view, looking at estate planning, trust structures and retirement, all seamlessly integrated into your wider wealth management and investment planning,” says Barrett.
How to draw up a will
Do you have a will? Does your family know where to find a copy of it? If you die intestate, your family could be subject to untold financial trouble. A simple and practical will, detailing how you wish to dispose of your assets, will ensure peace of mind.
‘The first step to drafting a will is to approach an expert for help,” says Scott Field, FedGroup group operations manager. Trust companies, banks, estate planners, accountants and financial planners are all capable of drawing up the document.
Peter Rigby, executive wealth planner at Alexander Forbes Financial Planning Consultants, says your financial planner is the logical person to approach. ‘They should already have a good understanding of your personal circumstances and your assets and liabilities.”
‘The estate planner has to consider how you are married, what your financial position is and how you see your estate being dealt with,” says Geraldine Bunting, a certified financial planner at Cheyenne Financial Services.
The estate planner must consider complex business arrangements, the legal status of your marriage and any minor beneficiaries you may have from previous marriages or relationships. Drawing up a will presents a good opportunity to find copies of your marriage certificates and review any related agreements. It is also important to consider the appointment of guardians for minor children in the event of a joint death. Rigby says you should decide upfront who these guardians will be and inform them of your decision.
When drawing up a will, document all the assets and liabilities in your estate and keep these in a separate and accessible file. Confirm the ownership of each asset and any legal obligations you have not yet complied with. Far too many people have settled their vehicles, but never taken ownership, for example.
Changing ownership after a death is unpleasant. Your asset list will guide you in taking up ‘enough insurance cover to pay off all debts without having to sell assets at discounted values”, says Rigby.
Ensure you have enough life cover to settle your home loan, car finance and any financed investments, such as second homes.
Knowing the value of assets in each spouse’s hands is essential to structuring the will in such a way that it will minimise estate duty and executors’ fees. It also ensures you can make full use of the R3,5-million individual estate duty abatement.
With the facts in hand you can decide who will benefit from your estate. But Rigby says you must determine whether your beneficiaries are old enough to manage their inheritance. Minor beneficiaries are often best provided for using a trust.
Once the will is drawn up, says Field, you should read it carefully to ensure you understand its contents. Rigby says you should also make sure your spouse, children or extended family understand your intentions in the event of death. This is of particular importance where sentimental items are concerned. Finally, you should let your family know where to find a copy of the will.