What is estate planning?

Estate planning can be exceptionally complicated. In essence it’s about handing over your belongings to other people when you die – yet the process and details are just crazy. I would not dare to say I will be able to give you all the info in the world in this article. 

I would like to touch on a few important aspects, including an estate plan, tax and the process when you die – these will help us in making better decisions while we are alive.   

In essence, estate planning is to preserve, increase and protect assets and belongings while you are alive, and how this will be distributed to people, organizations and governments when you die. Ideally you want to get the most effective methods of distributing wealth to succeeding generations – as per the wishes of the estate holder (the soon-to-be-dead person)

Do you need estate planning?

If you are over 16, you should consider having a will and testament in place. This will make it easier on the people you left behind.

What happens when you die?

When you die, you will be called the deceased. 

All your belongings will go into an estate. 

Someone (the executor) will be required to calculate what you’re worth and deduct any debt and costs 

The executor will distribute it according to your will and testament to the beneficiaries.  

What does estate planning include?

Estate planning can be complex – you can add very big words and legal jargon to resolve your estate in a tax efficient and quick fashion. The following should be taken into consideration:

  • Will – you need a will and testament that will explain to whom you will leave your estate.  
  • Bequests – this is a legal term that means the ‘legacy’ that you will leave to the beneficiaries.  
  • Donations –  you might want to make a special donation to me when you die for teaching you about estate planning
  • Selling Assets – you might want some assets to be sold and the proceeds given to a certain person and other assets given to a certain person. 
  • Life insurance – remember it can take years for an estate to be resolved. It therefore makes sense that your family needs cash flow until it’s been resolved. 
  • Reducing taxes – estates can be expensive and minimising taxes is exceptionally important.

Last will and testament

Your last will and testament should include your last wishes and any legacy that you want to leave. There will be some technicalities like an estate trust and other mechanisms that will minimise the tax payable. 

Here are some of the more general things that should be included:

  • Who should inherit your world
  • Specific items that you would like to leave to someone
  • Specify someone to be your executor. Include the value of all fees payable 
  • Make sure to date and sign every page

    What happens after you die?

    When doing estate planning, it’s worth knowing what will happen when you’re not here anymore. This will give you a better idea about what to plan for. 

    Let’s say you, the testator, have a will in place and you specify the executor. This person will try to wrap up your estate by calculating the difference between your assets and liabilities – i.e. what you have and what you owe. 

    He has a very big job which includes:

    • He must notify all creditors (people that are owed money) of the death.
    • He also needs to collect all money owed to the estate
    • He needs to pay all the legal costs from the estate
    • He must give an account to everyone affected and the heirs
    • all distributions to the heirs in the form of inheritances must be done through the executor.

    Heirs and legatees

    If you’re writing your testament, you’re able to specify if someone must get something special. Think about it –   you want someone to inherit Sauron’s One Ring. The person who will get this is called a legatee (from the word legacy).

    The person inheriting the estate (the heir) will receive what is left after special conditions are met  

    What if I don't have a will or testament?

    According to the Intestate Succession Act, the estate must be divided between the deceased’s spouse and dependents. The surviving spouse inherits the greater of R 250 000 or a child’s share. A child’s share is determined by dividing the total value of the estate by the number of the children and the surviving spouse.

    • If the spouses were married in community of property, then half of the estate goes to the spouse. The rest has the ISA applied to it.
    •  If there is no surviving spouse or dependents, the estate is divided between parents and siblings. If there are no parents or siblings, then it will be divided between the nearest blood relatives.

    Fees and taxes

    The executor is allowed to make money from the estate. The executor might need to pay VAT, if registered. You have the following options:

    • Make the payment fixed in your last will and testament
    • 3.5 % of gross assets – that is before any fees come off
    • 6% on income received and collected from the date of death

    Having said all of the above, estate tax and capital gains tax (CGT) will also be payable on all items in the estate. 

    Estate duty is paid at a rate of 20% on the first R30 million of the dutiable estate, and 25% on anything above R30 million.

    Dutiable means anything after all legal deductions. Examples of this is include death bed expenses, transfer costs of property to the spouse and the first R3.5 million of the value of the estate.

    According to law, if you die, it is seen that you have disposed of your assets. If you do this, you need to pay capital gains tax (CGT). CGT is not a separate tax but forms part of Income Tax. Individuals and deceased estates are only taxable for 40% (the inclusion rate). this means a maximum rate of 18% would be levied.

    Life insurance policies

    Many people don’t like insurance policies. They don’t like to be insured in case they die – who cares? You’re dead…? The issue here is that you need to provide cash flow for your loved ones to survive and settle your estate. 

    Though the idea of having your funeral covered and the snacks served, the main reason, in my opinion for life cover is to give bridging finance until your estate has been dissolved/resolved.

    It’s important to cater for fees such as estate duty, settling of liabilities, admin costs and other tax allowances such as capital gains tax incurred due to debt.

    Assets

    I cannot do a full write up here of all assets and how they are treated differently, as there are way too many. For example, if you hold shares in a foreign country, you might be liable to pay estate duty there first – and then again in South Africa once the money lands here. 

    It’s best to list all of your assets and check what the tax implications will be.

      Where can I find everything?

      Lastly, I want to encourage you to find a central place to store all your most important documents. 

      It’s not for you, but for those close to you to be able to find, resolve and consolidate after your death. 

      This list should inlcude bank accounts, shares, retirement annuities, properties and insurance accounts

      Conclusion

      We don’t like talking about death.

      We should start.

      We must get all our documents in one central place so that our loved ones do not need to dig frantically through our things when we’re dead to find a living will.

      Plan now while you still can.

      Happy investing!

      Sources consulted