PLANNING POINTS
By Ryan McCaughey
In this month’s article, I’ll go into more detail about the importance of estate planning, as well as the benefits of it throughout your financial journey. When it comes to estate planning, many believe that it’s as simple as drafting a will. It is, however, quite a complex process with far-reaching and long-term impacts, especially if the value of your estate exceeds R3.5 million.
How is an estate defined?
In terms of legislation, the deceased estate of a person ordinarily resident in South Africa includes his or her worldwide assets. This includes all property and deemed property situated both in and outside of South Africa. In short, your estate consists of all your assets and liabilities.
Any individual who wants their assets to be transferred to their loved ones should seriously consider their estate plan, and be aware of the importance it can play in the ultimate benefit of their loved one’s future.
Importance of estate planning
Effective estate planning should always form an integral part of any financial planning process. This is because the provisions of your will significantly impact the devolution of your assets, which has a longer-term impact on your beneficiaries.
Estate duty, capital gains tax, continuity, and the protection of assets against creditors are just some of the factors that should be adequately assessed when compiling a financial plan. This is so that any anticipated impact can be incorporated into your longer-term inter-generational financial plan.
Estate planning is essential for the following key reasons:
- Establishing the financial needs of your beneficiaries.
- Establishing liquidity needs within your estate.
- Ensuring adequate provisions have been made to cater for your beneficiaries and/or estate liquidity needs.
- Ensuring that your wishes are executed after your passing.
- Ensuring that beneficiaries are protected, especially when it comes to a minor child beneficiary.
- Estate planning can assist in the reduction of a tax liability at death or during your lifetime.
Engaging the services of a Certified Financial Planner (CFP) can play a vital role in providing professional estate planning assistance when reviewing your estate. Additionally, a CFP professional can assist you with the drafting of your will, as simple errors in the wording, or the exclusion of certain basic legal provisions could have a dire impact on your estate, or on the rights of your beneficiaries.
Importance of a well-drafted, up-to-date will
Having a will drafted to meet your wishes is absolutely critical, and can be one of the most important documents you will ever sign, especially if you are married and/or have dependants. If you pass away without a will (die intestate), it will delay the finalisation of your estate, and could have a negative impact on the ultimate transfer of your assets. There’s a specific set of rules of succession that are applied to the distribution of an estate when intestate, which might lead to unintended beneficiaries inheriting from your estate.
Updating your will is one aspect of financial planning that often gets overlooked. Our personal and financial circumstances change over time, so I would highly recommend that you review your will accordingly in order to maintain it in line with your ultimate wishes.
Costs associated with winding up an estate
The process and costs of winding up an estate can often be a very complex and costly exercise. A comprehensive financial planning process can assist you with catering and/or planning for this eventual event. These would include:
- Master of the High Court fees – based on the size of your estate, and capped.
- Executors’ fees, which are set at 3,5% plus VAT on the value of the estate (and also sometimes negotiable depending on the size of the estate).
- Transfer fees where there are properties involved.
- Minor general administrative fees.
- Funeral and deathbed expenses.
- Estate duty – this duty is levied at 20% on the dutiable amount of an estate that does not exceed R30 million, and at 25% on the dutiable amount of the estate value exceeding R30 million.
- Capital gains tax – applicable to profits made on the sale of an asset.
All of these costs are charges against your estate. It’s therefore important to ensure that there’s adequate liquidity to cover these costs, as well as any liabilities that are outstanding when you pass away. Any shortfall would force the executor to liquidate assets – sometimes at a lower value due to inopportune timing.
The sooner you head down the estate planning journey the better! Next month, I’ll continue to offer my perspective on a sound financial plan, focusing on the importance of assurance planning such as life cover and income protection, so that we can all stay informed and empowered when managing our financial well-being.
Ryan McCaughey, CFP, heads the Cape Town branch of Hewett Wealth. He is the Financial Planner of the Year 2021/22.
PERSONAL FINANCE