The value of estate?planning

2014-05-11 15:00

Contrary to popular perception, estate planning is of greater importance to women in light of the fact that they generally live longer. An estate plan is also not simply for the rich or those who earn a regular income

When Nosipho Khumalo, the breadwinner of her family, died, her family was surprised to find the taxes on her estate ate into most of their inheritance, leaving them with next to nothing. Unfortunately, this is a common mistake lawyers often see when people fail to give proper consideration to their estate planning.

Your estate is everything you own when you die. This includes your home, personal property, investments, bank accounts, retirement plans and any interests in a family business or partnership.

To avoid your family facing a similar fate to that of the Khumalos when you die, you should take the time to consult a financial adviser and address your estate plan. Estate planning is simply the process of arranging your affairs in such a way that in the event of your death:

.?Your estate can be wound up with ease and;

.?Your assets transferred intact to your beneficiaries.

Geraldine McPherson, a legal marketing specialist at Liberty, says you need to have a very clear idea of the extent of your assets and liabilities. This will help you determine how the liabilities will be settled and who is to inherit what is left over.

Your will

“When you draw up an estate plan, you leave instructions in terms of who inherits what in your will,” says McPherson.

If you don’t have a will when you die, the law of intestate succession applies. This means your assets are divided among your surviving relatives.

If you are not married, this could include the sister you have not spoken to in 10 years.

An important aspect of your estate plan is the nomination of an executor in your will to represent your deceased estate.

You can nominate a member of your family, but they will usually then have to appoint a professional such as a bank, a lawyer or a trust company. If you appoint a professional executor before you die, you can negotiate the fees they will charge.

When no executor is nominated in a will, this often leads to conflict between family members. The nomination process after your death can be time-consuming and can delay the winding up of the estate.

What taxes are levied on your estate when you die?

When you die, there are certain taxes that are triggered on your assets.

.?Estate duty, which is levied at a rate of 20% on the dutiable value of your estate. Note that the first R3.5?million in your estate is exempt from estate duty.

.?When you die, the capital gains on your assets, except those left to your surviving spouse, will attract capital gains tax. To calculate these gains, the taxman will determine the value of an asset in the year of your death and deduct the base cost (the cost to you of acquiring the asset or the value of the asset when capital gains was introduced in October 2001).

At least 33.3% of the taxable gain will be included as income in your tax return and is taxed at your marginal rate. The highest effective rate for a natural person is thus 13.3%.

The five exceptions to capital gains tax are:

.?The first R300?000 of any gains in the year of your death;

.?Any assets transferred to your spouse. In this case, the payment of capital gains tax is postponed to the date of your spouse’s death;

.?Assets bequeathed to approved public welfare organisations;

.?Long-term insurance policies; and

.?Your retirement funds.

Make sure your family has funds available

“To provide for these taxes, you need to ensure you have enough liquidity in your estate. Liquidity can be created through life insurance. You take out a policy on your own life specifically to fund the payment of these taxes,” McPherson advises.

But she says you still need to take other steps to ensure your family can receive some funds while your estate is in the process of being wound up. This means the funds in your estate need to be sufficient to pay your liabilities, settle any tax owing and also provide for your family.

“Your executor is able to make maintenance payments prior to finalisation of the estate, but may be reluctant to do so if there are any cash flow concerns,” she says.

Life insurance policy

A policy payable directly to your surviving spouse bypasses the estate and your executor. It pays directly to the beneficiary nominated and can be used immediately.

Bequeath your entire estate to your spouse

If you do this, there will be no capital gains tax or estate duty consequences.

“You have only to worry about your creditors, paying the executor’s fees and ensuring sufficient capital to replace your income as the principal breadwinner. The estate duty and capital gains tax will become applicable on the death of your spouse.”

Establish a trust

A trust established on your death is called a testamentary trust. It is the after-tax money and assets that are transferred to that trust. So any income tax, including capital gains tax, as well as estate duty must be paid first.

But according to McPherson, a testamentary trust can be an extremely important estate planning tool because it serves to protect the wealth you created during your lifetime for the benefit of future generations.

“If you intend for a minor to inherit and you nominate the minor directly without creating a testamentary trust to receive that benefit on his behalf, the inheritance will be reduced to cash and paid into the Guardian’s Fund, where it will only earn a predetermined interest rate.

“Provision should also always be made that in the event of the simultaneous death of parents, a testamentary trust is to be established for the surviving minor children,” she cautions.

It is important to note that a testamentary trust created for a relative(s), where at least one of the beneficiaries is under the age of 18, will be taxed more favourably than an inter vivos trust, until the youngest beneficiary reaches age 18.

Offshore investments

Your estate planner needs to know how those assets will be dealt with in the country where they are held in the event of your death or insolvency. Most estate planners will either outsource this function to someone more specialised in dealing with offshore investments, or will appoint someone in the country where the investment is held to assist with your estate planning.

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