I suppose you have heard people talk about the importance of Estate Planning. With more than twenty plus years’ experience in the administration of Estates, I have witnessed people laugh, cry and even Heirs wanting throttle each other when they discover the friend or family member died Intestate (without a last Will and Testament), and the same is true in instances where testate inheritance (with a valid last Will and Testament) is involved. Friends and family members have brought me wills in the past that were drafted by the deceased (also known as the Testator) but, because of bad drafting of Wills, a lot of harm and hardship has been caused to those who have been left behind.
A Will is the vehicle or tool whereby the person dictates the distribution of his or her assets and his/her financial affairs. This must reflect the wishes and intention of the testator. The question then arises: how does Estate Planning tie into the drafting a Will in accordance the Wills Act 7 of 1953 and what more is meant by the term? All the assets of the person can collectively be referred to as “the Estate” and a financial and succession plan would usually be tied to this. Upon the death of a person, an Executor or Executrix is appointed by the Master of the High Court to administer the Estate.
Part an Estate Plan involves a formalised Will. Even in the event that there was no will, a process must still be followed. Intestate Succession will only be applicable if there is no Will; however, if there was no financial plan in place, where there exists a possibility that there will be a cash shortfall in the Estate, the Will may not be capable of administration in accordance with all of the wishes of the Testator. This would mean that the wishes of the deceased may not be fulfilled as anticipated.
Where a person is nominated in a Will to receive an amount of money as a legacy and there are not enough funds in the Estate to carry out the wishes of the Testator, the Executor/ix may have to sell any fixed property to pay out the cash amount. The consequence is that the Heir who would have received the immovable property is no longer eligible to receive it. The right of the Legatee is stronger and stands in line for distribution before an Heir. There are specific rules that the Executor/ix will have to apply in determining how the Estate is to be distributed and, if no exercise was done beforehand to plan the distribution properly, it may mean that the Testator’s wishes fail.
How should people go about planning their estates? It is very important that people consult a professional when planning the Estate, because Estate Planning – or lack thereof – will have an impact on a person’s financial status. Ultimately, consulting a professional is necessary when considering legal issues the implications of which a layperson may nor otherwise be aware of. For example, what happens when one of the spouses dies first and what will be the outcome for the survivor? The order of death of spouses and considering what would happen in the event of possibilities like simultaneous death arising are important considerations. Should these not be taken into account, the restructuring of the assets in the Estate may be necessary to make the execution of the Testator’s wishes feasible.
In planning the Estate, care must be taken to ensure the Will provides for and safeguards the minor children affected by the Estate. This may necessitate the inclusion of a Testamentary Trust in the Will to take care of the minors’ needs. The Estate Planning may include other members of the family or third parties perhaps with special needs, who are dependants of the Testator. Estate Planning should provide for sufficient liquidity in the Estate after death. Thirty percent of deceased Estates in South Africa do not have sufficient cash available for liabilities in the Estate.
Taxes payable during the life of the Deceased and at death, including income tax and allowances for Capital Gains Tax and Estate Duty, should be projected and provided for. Business Succession planning must be taken into account in terms of shares within a company and how it will be disposed of upon the death of the holders of such shares.
What are the consequences when there maybe a subsequent marriage where there are different sets of children? Some people may have maintenance claims against the Estate of the Deceased. There may have been a previous marriage which created consequences such as maintenance (or alimony) of such spouse. Therefore, all the consequences from any subsequent marriage will have an impact on the Estate Planning and these consequences must be considered by the Estate planner, including their legal effect and how these factors should be integrated into the Estate plan.
What is the impact of marriage contracts on Estate Planning? The marriage regime terminates upon death. When parties are married out of community of property, each party maintains their own separate estate, just as existed before their marriage. These separate estates would be retained after divorce or the death of their spouse. Therefore, if one spouse dies, it is only that estate of the deceased that will be administered.
If spouses are married out of community of property and the house is only registered in the deceased spouse’s name, then transfer to their heirs will be necessary. If property is registered in the name of the surviving spouse, then there will be no effect, and the property won’t form part of the deceased estate. However, if the spouses are married out of community of property and the house is registered in both their names, it will operate similarly to where they were married in community of property.
What role do Trust play in Estate Planning? A Trust can form an integral part of succession planning. If, for example, you have three children and purchase a holiday home that you would like to remain in the family for a long time, for several generations, then placing it in a trust from day one means it will not be affected by the death of either of the spouses, because it’s considered a trust asset and there would be a smooth succession process.
Even if one parent dies, the children will remain the beneficiaries of the Trust and, after their death, even the third generation can remain the beneficiaries. Therefore, the property needn’t be transferred each time somebody passes on. If there are three children, it doesn’t have to be registered in all three of their names as it forms part of the Trust and there has been succession planning as the immovable property remains part of the Trust. This is an excellent succession planning instrument.
Where couples are married in community of property, each party has ownership over his or her fifty percent share which can have a financial impact on Estate planning. A property can be placed in a Trust for the benefit of the children as beneficiaries of the trust while the spouse will be an income beneficiary. Therefore, the surviving spouse will not be entitled to the capital of the farm, but for the duration of her life, she will get the benefits and the fruits of the farm. It is therefore quite clear that the Trust must form an integral part of your Estate plan.
To summarise, Estate planning must be dovetailed with Financial planning.
Arthur Johannes
Senior Associate
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes and should not be construed as legal advice.
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