Estate planning is the process of structuring one’s assets during one’s lifetime to ensure that they are preserved and legally protected and that, in the event of death, those assets are transferred expediently and intentionally to successive generations. It’s a serious exercise that everyone with assets should undertake although, sadly, many people fail to do so.
Here, we explore some important facts about estate planning to encourage more people to put estate plans in place.
1. Dying intestate is traumatic for those left behind
If more people understood the turmoil, anxiety and uncertainty experienced by the loved ones of a person who has died intestate, more people would put wills in place. There are so many potential unintended consequences of not having a valid will in place which can have devastating financial and emotional consequences for those left behind. The laws of intestacy, which are set out in the Intestate Succession Act 1987, set out a strict formula for the distribution of one’s assets in the absence of a valid will to ensure that your estate is divided amongst your surviving spouse, children, parents, or siblings following your death, which could result in family members benefiting from your estate contrary to what you would have liked.
2. Your freedom of testation has limitations
While you are free to bequeath your assets to anyone you choose, it is important to be cognizant of the statutory and common law limitations on your freedom of testation. In terms of common law, any provision in a will which is unlawful, against public policy, impractically vague or impossible to fulfil cannot be executed. For example, if you bequeath property to your son on condition that he divorces his spouse, this provision will be deemed against public policy. Your freedom of testation is also limited by the duty of support created by the bonds of marriage and, if you fail to provide adequately for your spouse in terms of your will, your surviving spouse can bring a claim against your deceased estate in terms of the Maintenance of Surviving Spouses Act for reasonable maintenance. Similarly, if you fail to provide financially for your minor children, they have a common law right to claim against your deceased estate for maintenance.
3. Your marriage contract affects your estate plan
Your estate plan cannot be accurately drafted without taking into account the nature of your matrimonial property regime. This is because your marriage contract sets out the financial consequences of your union and has a direct bearing on your ability to testate. Further, our law provides spouses with certain mechanisms to help reduce estate costs and taxes, so it’s important to understand how these can be used effectively in your estate plan. For example, if you are married in community of property, you will need to keep in mind that only 50% of the joint estate is yours to bequeath and that bequeathing any assets in the joint estate to a third party could create complexities for your spouse in the event of your death. If you are married with the accrual system, it is important to bear in mind that your surviving spouse may have an accrual claim against your estate should her estate be smaller than yours which, in turn, can affect how you structure your estate plan.
4. Mental incapacity can affect your estate planning
In terms of our common law, if a person cannot fully understand the consequences of their actions due to a mental illness or disability, that person lacks the capacity to perform a specific act, such as signing a contract or a will, and that document would then be considered void as a consequence. As such, it is important to ensure that your estate plan and all supporting documentation are drafted and signed while you have full mental capacity as any form of diminished capacity can affect your legal capacity. Remember, in terms of our law, it is not necessary to have been formally diagnosed with a mental illness to lack mental capacity. The risk of suffering from some form of dementia increases with age which means that reviewing and updating your estate plan regularly is critical.
5. Death triggers a capital gain
Tax planning is an important part of your overall estate plan, and it’s important to factor in the various taxes that your estate may be liable for. Keep in mind that your death will trigger a capital gain meaning that, upon your death, you will be deemed to have disposed of all your assets for an amount equal to the market value of the assets on the date of death. As such, the executor of your estate will need to prepare a post-death tax assessment in which all CGT payable by your estate must be declared. Keep in mind that all capital gains tax payable by the estate will be reflected as a liability in the estate and therefore not estate dutiable.
6. Trusts serve a specific purpose (and you don’t necessarily need one)
Trusts can make excellent estate planning tools but should only be used to achieve a set of specific estate planning purposes. There are significant legal and financial consequences that come with setting up a trust so avoid forming a trust just for the sake of it. If you have minor children, it makes sense to make provision in your will for a testamentary trust which can house their assets until they are old enough to manage their affairs – and this is the most common form of trust used in South Africa. You may have a specific need to set up a trust while you are alive – such as to house growth assets outside of your personal estate – or to set up a business trust in which to house your investment properties, although keep in mind that trusts are a specialist area of expertise, and it is always advisable to seek guidance from a fiduciary expert.
7. Debt follows you to the grave
Even in death, paying your dues is unavoidable and making provision for the debt in your estate is an important part of estate planning. Failing to do so can leave your loved ones and heirs financially compromised, so be sure to fully understand your financial obligations when putting your estate plan together. Remember, if there is insufficient liquidity in your estate to settle debt, your executor may have no other choice but to realise certain assets in your estate to meet the obligations of your deceased estate. In doing so, the executor may look for equity in the form of life policies, property, vehicles or other assets in order to pay the estate’s creditors. If having sold all the assets in the estate, the executor is still unable to settle all the debts, the estate may be declared insolvent meaning that the laws of insolvency will then apply to your estate.
8. Retirement fund benefits do not form part of your estate
While retirement funds can make excellent estate planning tools in that the funds are protected from creditors and not subject to estate duty, keep in mind that these benefits will be distributed in accordance with Section 37C of the Pension Funds Act in the event of your death. This means that, although you would have nominated beneficiaries to your policy, the distribution of your retirement fund death benefits is the responsibility of the fund trustees who are obliged to divide them equitably amongst your financial dependants. So, if your loved ones are relying on your retirement fund benefits, keep in mind that the award made by the fund trustees may be different to what they are anticipating.
9. Your will is only one component of your estate plan
Your will is a hugely important estate planning document although its actionability rests heavily on the correct structuring of your estate. As such, it is essential to ensure that your will and estate plan are completely aligned so that no ambiguity or confusion arises upon your death, or that your will and estate plan are at odds with each other and not aligned with your intentions.
10. Solvency and liquidity are not the same things
It is important to bear in mind that estate liquidity and estate solvency are two different things. Your estate may be solvent in that the value of your assets exceeds your liabilities, but if all your assets are illiquid in nature, your estate could face liquidity problems resulting in the forced sale of assets to settle its debts. As discussed above, selling off assets that were intended for the benefit of your heirs and legatees can have devastating financial consequences for your loved ones. So, while your estate is technically solvent, its lack of liquidity can result in administrative delays and financial loss for those you intended to benefit from your estate.