As the famous quote goes, there are only two certain things in life – death and taxes. So why do so many of us avoid thinking about what will happen to our loved ones when we do eventually leave them behind?
While it is natural for people to avoid the thought of their death, the sad truth is that many South Africans will leave their loved ones behind, not just with heartache over their passing but with the added and unnecessary burden of administration, taxes and other estate liabilities, feuding amongst surviving family members, and unprotected family assets, to name a few.
In this article we will outline a few simple things you can get in order now to ensure that you leave the ones you love without any undue burdens other than their need to mourn your loss.
Draft your will
A well drafted will takes away the uncertainty of what happens to your assets on your death at a time when your bereaved family is mourning your loss. It avoids any chaos that may occur regarding differences in opinions amongst family members.
It is equally important to ensure that your executed will is updated from time to time. We all go through many major life changes, some of which occur within rapid succession of each other - and the effect of not updating a will could mean that the birth of a new child/grandchild, marriage, divorce, death of a nominated beneficiary or the instance of one of your children becoming self-sufficient goes disregarded in your will. There are also questions that need to be addressed like: ‘What happens when a surviving spouse re-marries?’ and ‘What happens when a surviving spouse has subsequent children?’ So often we assume that things will take care of themselves and that assumption may lead to chaos amongst family members after your passing.
It is also important to note that certain assets will not be dealt with as part of the deceased estate. Assets like a life policy, living annuity, retirement fund (pension, provident or retirement annuity) cannot be bequeathed to beneficiaries in terms of a will and one needs to understand the consequences of said assets when bequeathing assets that do form part of the estate.
Know what your estate expenses will be and how they will be paid
In winding up your estate there are certain expenses to be aware of. Some of these can be significant and you should have a plan as to how they will be funded.
1. Estate duty: estate duty is tax on property levied on a deceased estate at 20% above ones net estate of R3.5m. Any asset left to a spouse qualifies for a “roll-over” relief and only becomes dutiable on death of the surviving spouse. If it is not used, the R3.5m abatement can be transferred into a surviving spouses estate on death.
2. Capital Gains Tax (CGT): on death, the deceased estate is liable for CGT on capital assets with an exemption of R300 000.
3. Loan accounts: any outstanding loan account is usually settled on the death of the loanee
4. Cash bequests: cash bequests to beneficiaries are not, strictly-speaking, an expense of the deceased estate but cash is required in order to settle the bequest amount.
5. Other: there are also other expenses such as funeral costs, executor’s fees, etc to consider.
The importance of understanding these estate expenses is to establish if the deceased estate will have sufficient cash to settle these expenses. Often having sufficient assets is confused with having sufficient cash. If there isn’t sufficient cash in the deceased estate, the executor may be forced to sell (immovable) property in order to fund the expenses. It is safe to assume that a forced sale in a deceased estate is not in the interest of the estate as you may not get fair value in a forced sale. A qualified estate planner can assess the cash required on death to settle expenses of the estate and will recommend a life policy to protect your deceased estate against the forced sales of assets.
Understand how estate duty will be applied to your investments
• Life policy/living annuity:
Both a life policy or a living annuity creates a contractual obligation for the life insurer to pay out a benefit on death of the policyholder/annuitant to a nominated third party. This nomination overrides any nomination made in terms of the deceased will. From an estate duty point of view a life policy is dutiable in the estate of the deceased life assured (which may differ from the policyholder), whereas the living annuity is exempt from estate duty (other than any contribution made that didn’t qualify for a tax deduction).
• Unit trusts:
A unit trust does not provide for the nomination of a beneficiary and from an estate duty perspective the asset forms part of the deceased estate and is therefore liable for estate duty.
• Retirement Funds:
The beneficiaries of a retirement fund are governed by Section 37C of the Pensions Funds Act. Ultimately the discretion lies with the trustees of the retirement fund, but the trustees are guided by Section 37C. The retirement fund member usually provides the details of nominated beneficiaries and these nominations are usually considered by the trustees when determining who the actual beneficiaries are. The purpose of Section 37C is to ensure that individuals who were actually dependant on the deceased member are not excluded from benefitting from the distribution of the retirement fund.
It's important to note that trustees often struggle to find beneficiaries. Nominations are usually made many years prior to death and nominee details often change years later. It is thus important to ensure your nominee information is updated from time to time. This simple act may avoid months of wasted time of trustees trying to find beneficiaries.
• Offshore investments:
A South African resident is liable for estate duty (as mentioned above) on all assets, regardless of whether the assets are sourced within South Africa or abroad. Beware however that even though a foreign asset of a South African resident is dutiable in South Africa it may also be liable for a similar “estate/inheritance” tax. Fortunately however, South Africa does have a double tax agreement (DTA) with most foreign jurisdictions which prevents the assets from being taxed twice.