Estate planning is not only for the super wealthy

By Jaco de Beer, Private Wealth Manager, NFB Private Wealth

Estate planning is not only for the super wealthy
Estate planning is not only for the super wealthy. Image source: Pixabay

The loss of life as a result of the Covid-19 pandemic has forced people to seriously consider their own mortality. There is a growing realisation that life is fragile and can suddenly and unexpectedly change course, impacting those nearest and dearest to us. Therefore, planning and preparing for the worst eventuality with a will in place has become a no brainer, ensuring less impact on those left behind, during a very difficult time.

Estate planning is essential to preserve and protect your assets for the benefit of subsequent generations and to ensure that there is sufficient liquidity in the estate to cover estate duty, taxes, bequests, debts and administration costs.

An estate is fundamentally the sum of an individual’s net worth. It is made up of personal possessions, real estate or property, investments and life insurance. There’s misconception that only high net worth individuals (HNWIs) have to do estate planning. Given that most people have some possessions – be it a home, car, jewellery or investments that they may want to bequeath to certain family members – this requires estate planning. Having no process or plan in place to wind up an estate can cause unnecessary family stress.

The good news is that you don’t need to do this alone and a trusted financial advisor or attorney can assist. There are five considerations that need to be factored in when managing an estate. Arguably the most important element is to have a will. More than a legal document, a will is a vital element of any estate plan. Ensure that your will is up to date and is reviewed on an ongoing basis with a specialist in this area.

It’s estimated that as many as 70% of working South Africans don’t have a will. Should someone die without a valid will, their estate will be administered in terms of the Intestate Succession Act 81 of 1987 and the estate will be divided up amongst the surviving spouse, parents and children according to a predetermined formula. It’s a tedious and drawn-out process.

To avoid this, ensure that your will is regularly updated, particularly if your marital status changes, if an heir passes away, if property is purchased or sold, if an heir immigrates, or there are trust funds for children.

Another consideration is the cost of estate administration. This is set at a maximum of 3.5% (excluding vat) of the value of the estate. It is a good idea to agree this the cost upfront and have it recorded in the will as fees are negotiable. This boils down to personal preference. Some financial institutions charge the maximum 3.5% in fees and may take an extended period of time to wind up an estate.

A local executor is something to consider. At a time of loss, family members might not know where to start and being able to walk into a physical office or call a pre-defined person and have a one-on-one meeting will make things easier.

Many financial institutions centralise the administration of deceased estates. This often results in the need for a number of meetings to clarify and resubmit documentation. Be aware that the person doing the initial interview, will most likely not be the appointed executor. Communication with the executor often happens vie email or telephone.

In these instances many people may feel like just a number. Access to a local executor will make it easier for family members to ask for advice and to receive individual attention.

The reality, however, is that even the most organised estate and up to date will does not remove the extensive administration required of a deceased estate. Your trusted advisor, who your family needs to know, can make this process easier by being present when meeting with the executor.

Another consideration is liquidity in a deceased estate. Liquidity is required for a number of reasons including any debt that might need to be settled such as bonds, credit cards and vehicle finance, as well as all the relevant taxes or estate duty (if applicable) and costs that need to be paid.

In the event of insufficient liquidity in the form of liquid investments or cash, the executor might be forced to sell assets to generate cash to meet the estate’s financial obligations. This can result in assets being sold for less than their value rather than being transferred to beneficiaries. An executor should be able to advise on capital gains tax (CGT), which can have an impact on the amount of cash or assets that are distributed to heirs.

One way of alleviating liquidity issues is to have an income death benefit in place to make up for the potential loss of income in the event of the death of a bread winner. An income death benefit is not reserved for HNWIs only but is something that everyone who is contributing to a household should consider as it will allow beneficiary needs to be covered on a monthly basis in a tax effective way. An income death benefit can be considered to cover income needed to maintain the household, addressing monthly cash flow requirements.

It is important to have a death or an estate file in a place that your next of kin know about. The file should contain things like bank accounts, online passwords, social media accounts and passwords, any investments you might have, who your attorney is, who your financial advisor is, where your will is housed, who handles your tax, car registration documents, anti-nuptial contracts (ANC), divorce orders and any savings or bank deposit boxes you may have. This will make handling your passing much easier for family left behind.

Estate planning needs to be looked at holistically and is part of an individual’s overall financial planning. Other issues to consider include whether you have sufficient life cover in place to cover any outstanding debt as well as sufficient money to see your children through school and university; do you have medical aid; and is your will up to date?  This also include discussion on trusts (if applicable), business succession planning and the minimisation of costs.  Estate Duty, which is a tax that may be payable, needs to be factored in.  This can be saved by limiting most of the growth in the actual estate.  The considerations are many and multifaceted.

The executor’s function is to effectively step into the shoes of the deceased, wind up their financial affairs and distribute their assets in accordance with the directions contained in the will. These tasks need to be done efficiently, tax effectively and timeously, in terms of the Administration of Estates Act, to ensure that inheritances are not unduly delayed.

Entrusting this responsibility to a local executor, with the inclusion of your trusted advisor can ensure the process is as efficient as possible, providing peace of mind to one’s family at a time that they need it most.

Finally – remember the following:

  • Will –  make sure you have an updated version and that the important people on your life knows where to find it or who to contact,
  • “Death File” –  this should contain records of or, originals of all the important documentation, as mentioned above.
  • Liquidity, liquidity, liquidity – make sure funds are available immediately to your spouse or next of kin.

By Jaco de Beer, Private Wealth Manager, NFB Private Wealth