Estate planning: What to consider

The main idea behind estate planning is to structure your affairs in such a way that you achieve some or all of the following objectives:

• Protection of assets against the possibility of a forced sale by providing sufficient liquidity during the winding up of the estate 
• Protection of business interests
• Facilitation of the administration of the estate
• Practical enforcement of your wishes and needs as set out in your will
• Flexibility to ensure that future adjustments necessitated by changing financial and family needs and circumstances can be made
• Harmony in the family
• Tax efficiency.

Factors to consider

The following factors must be taken into account when you draw up your estate plan:

Your will: A will is the cornerstone of any estate plan. It helps to ensure that your wishes are clearly stated and makes provision for who will inherit your assets after you die. A properly drafted will can ensure that your possessions are protected and distributed appropriately.  

Marriage regime: Your marital status and regime will have an impact on the division of assets at your death. For example, if you are married out of community of property with the accrual system, your surviving spouse could have a claim against your estate, or your estate could have a claim against the surviving spouse. This may create liquidity problems, since the claim is usually payable in cash, which could lead to your surviving spouse receiving more than you intended, thereby negatively impacting the bequests intended for other beneficiaries.

Couples that are married in community of property share equally in their assets, money and property, as well as all debt. Only a half-share of the assets can be dealt with in your will, as the other half-share belongs to the surviving spouse.

Estate duty and donations tax: These two taxes broadly provide for the same outcome, but they have different impacts on both your estate and your heirs, and it would be prudent to bear in mind the difference when drawing up an estate plan with your adviser. From 1 March 2018, the estate duty rate is 20% on the first R30-million of the dutiable estate and 25% on the dutiable amount of estates above R30-million in value. 

Any donations you may have made over your lifetime are subject to donations tax of 20% on the first R30-million of donations (cumulative over your lifetime), and 25% on donations above the R30-million threshold. You have an annual exemption of R100 000 of the value of all donations made during the tax year, irrespective of whom the donation is made to. Donations between spouses are exempt from donations tax. By incorporating a donations strategy into your estate planning, you could, for example, essentially pay estate duty “in advance” to benefit your heirs.

Capital gains tax (CGT): You will be deemed to have disposed of your assets to your estate at your death, which will have CGT implications. The annual exclusion in the year of death is R300 000. You qualify for a primary residence exemption of R2-million, and R1.8-million on small business assets or an interest in a small business if certain requirements are met.

Any bequests to a surviving spouse will be treated as a transfer at base cost for CGT purposes. This is referred to as a rollover. This means that no CGT liability will arise when assets are bequeathed to a spouse. This liability is, however, merely postponed until the death of the surviving spouse.

Liquidity: You need to ensure that enough liquidity will be available for costs, liabilities and taxes to be met without having to dispose of assets at possibly the wrong time and at relatively low prices. The following assets can be taken into account to determine the liquidity in your estate:

• Cash
• Liquid investments
• Life insurance – where the estate is the nominated beneficiary.

Life insurance is one way of providing money to be paid into your estate to ensure liquidity. Domestic life policies are deemed property in your estate. If you have nominated private individuals as beneficiaries, the proceeds will be paid to these beneficiaries directly but will be dutiable in your estate, with the executor being able to claim a proportionate part of estate duty from the nominated beneficiaries.

Annual review

Estate planning is not a one-off event, and your plan should be reviewed whenever your circumstances change, for example, in the event of:

• Divorce
• Emigration
• A change in marital regime
• The addition of dependants
• Acquiring offshore assets
• Disability
• Retirement.

Comprehensive estate planning will enable you to structure your affairs according to your wishes and in line with your objectives. It will also leave your loved ones with less to worry about after you’re gone, and could prevent unintended complications. Since compiling a plan along with carefully drafted wills can be complex, it’s crucial to obtain professional advice. If you have any questions or need assistance in reviewing your estate planning, call Fay Nkosi at Sanlam Private Wealth on +27 (0)11 778 6632 for an appointment, or email [email protected].

— Fay Nkosi is a Fiduciary and Tax Specialist at Sanlam Private Wealth