While the possible ramifications of your death will never be a pleasant topic, I can guarantee you one thing… any possible ramifications are multiplied exponentially by you not having a plan in place. I cannot stress enough that estate planning is not about you, it’s about your loved ones.
Why is estate planning important?
Every now and again when I meet with a new client and introduce the concept of estate planning, I am met with a response such as: “Oh I don’t want to think or talk about death, that is such a morbid topic”.
While the possible ramifications of your death will never be a pleasant topic, I can guarantee you one thing… any possible ramifications on your demise are multiplied exponentially by you not having a plan in place. I cannot stress enough that estate planning is not about you, it’s about your loved ones.
In addition to this, please don’t make the mistake of thinking that estate planning is only for the uber wealthy or elderly people. Not having a plan in place to settle your affairs once you are gone often has a long lasting and costly impact on those you leave behind.
What many well-meaning people don’t realise is that having a comprehensive and up to date estate plan in place acts as a catalyst in the handling of their estate. You may have some of the basics in place like a will or life cove (if required), but making sure that these elements all dove tail ensures that your estate can be wound up as efficiently as possible which means that your loved ones are not left waiting unnecessarily.
What is estate planning?
Estate planning involves taking stock of and managing your assets and liabilities while you are alive and the distribution of such assets and settlement of such liabilities upon your demise.
For me a good estate plan has the following characteristics:
Flexible to the required situation;
Ensures a liquid estate;
Provides clarity; and
Is comprehensive in nature.
Flexibility
Ensuring that your loved ones’ needs are adequately catered for and protected in the event of your demise is a major benefit of estate planning. A well thought out estate plan is flexible in the sense that it considers and provides for a variety of eventualities, I will discuss three of these eventualities for illustrations sake:
Let’s start with the one eventuality that is normally at the forefront of one’s mind, namely what happens if the primary bread winner passes away? As can be expected, this scenario will have a tremendous impact on the loved ones left behind and in particular the spouse who now needs to support the entire family. In this case, provision will need to be made to replace the shortfall in monthly income (at the very least a portion thereof) as well as provide for specific expenses such as education expenses for the children.
A lesser considered eventuality, but no less important, is what happens if the spouse who is not the main breadwinner passes away? Invariably this spouse either fulfills the main parenting support role and may earn a supplementary income. How will this income be replaced? More importantly, how will this support role be replaced? Yes while the bread winner might be able to take on more responsibility in the parenting and family support sphere, they themselves will need support themselves in order for them to keep on working and provide for their family. In light of this, it is prudent to provide for funds in order to cover the lost monthly income of the deceased spouse and/or provide for an aupair to assist the main breadwinner with their children.
Finally, we need to plan for a possible eventuality where both parents either pass away simultaneously or within quick succession. Questions like who will care for your children if you are both gone need to be discussed and formalised in your wills. We also need to provide for funds to assist this nominated person/s in providing for your children. Measures need to be put in place to safeguard these funds (a trust for example) so that these funds are actually used for their intended use, to provide for your children and not something else. In addition to this, now that both parents have passed on, all assets will be subject to estate duty which if not considered can result in your children receiving far less than is required in order to provide for their needs.
Liquidity
An estate plan sets about ensuring that your estate is liquid. In other words, we need to ensure that all your debts & taxes (such as estate duty, capital gains tax and final income taxes) have been provided for.
The fact of the matter is that it is expensive to die and if not adequately provided for, your loved ones will bear the brunt of this expense. For example in South Africa, your estate is subject to a 20% estate duty which is levied on the first R30 million of the dutiable amount of your estate and 25% on the amount exceeding that figure, after taking into account allowable deductions.
If there is not sufficient liquidity (cash) in your estate, assets will have to be sold to provide the cash required in order to settle debts and other expenses. This will mean that your beneficiaries would inherit less than you had intended to leave to them.
The easiest example is that while it could be your intention for your loved ones to remain in your existing house, if there is insufficient liquidity in your estate, this house will have to be sold in order to generate this liquidity. You don’t want your loved ones to be left in the lurch.
Clarity
A good estate plan is clear and leaves no room for ambiguity. As mentioned above, an important element of your estate plan is not only having a will in place, but to ensure that this document dovetails with your needs, your wishes, and your beneficiary nominations on retirement funds and life insurance policies. These elements must speak to each other and leave no room for confusion.
Despite the importance of having a will in place, according to Standard Bank, 70% of South Africa’s working population does not have a will in place, which is quite frankly petrifying!
This document is so important that I have written an article which focuses just on this document - please see this article under my blog posts for more detail.
Comprehensive
A detailed estate plan is comprehensive in it's nature. Certain assets/structures require a more multi-faceted and intricate approach to estate planning. Two such examples which require special consideration are farming assets & structures and offshore assets.
Farming assets/structures - The estate of a farmer requires specialized advice as there are a number of factors which need to be considered which are either unique to farming or whose consideration becomes more imperative. A complex structure of intertwined entities (trusts etc.), possible usufructs on death, livestock being held in the farmer's personal name, and the liquidity of their estate are examples of such factors. As a commercial dairy farmer's son, I understand both the farming culture and importance of tailored estate plan.
Offshore investments - While most people are aware that South African estate duty is payable upon their death, they are totally unaware that the US and UK also levy an estate duty on certain assets, these taxes are collectively know as situs taxes. You need to ensure that your offshore investments are correctly structured otherwise your beneficiaries could be in for an almighty shock once you pass on (Source: Investec – Death and taxes: Situs explained).
I hope that this article both shed some light and convinced you of the important of estate planning. It is important that you find a financial planner who assists you in crafting an estate plan tailored to your unique needs and circumstances. (Note: not all financial planners have the requisite knowledge and are used to dealing such complexities as farming structures/assets and offshore investments) - Contact me today so that we can ensure that your estate planning is adequate.
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