By Essie Bester
Estate is the legal term used in law for all your assets that have a money value. All your assets and liabilities therefore form part of your estate.
What is estate planning?
Estate planning (for small as well as large estates) refers to planning the transfer of your estate to your heirs (who may be people, organisations or legal persons) after your death.
Trisca Hattingh, head of fiduciary services at GTC, a leading firm for wealth and financial advice, says: “Even careful planning can come to nothing if an estate is not sufficiently liquid to cover the obligatory administrative costs and liabilities that become payable in the event of death.”
Solvency and liquidity are not the same
Hattingh says she deals with many estates where people wrongly think that liquidity and solvency are one and the same thing. Solvency can be explained as a state in which the total assets in your estate exceed the total liabilities.
Insolvency, therefore, is when, after the sale of every possible asset, there still is not enough money to cover the liabilities of your estate. This also means that nothing is left for your heirs.
Liquidity refers to whether there is enough money in an estate, or assets that can be easily converted into money, to meet the liabilities of the estate and paying immediate costs without having to sell assets that would otherwise have been a legacy for beneficiaries.
Liquidity therefore means that enough money must be available to:
pay estate duty;
pay estate expenses and administration costs; and
make provision for tax liabilities ─ such as capital gains tax ─ that could arise upon death.
The right steps to take when planning an estate
- Determine your liabilities – First, identify all the different assets in your estate and give them a market value. Ask your bookkeeper to help you. Use your financial statements, short-term insurance contract and policy contracts to help you. The total value of all your possessions (your estate) is called the net value of your estate.
- Determine your liabilities – List all your debts and determine their value. Add to this the costs that will arise after your death during the finalisation (administration) of your estate. Use your annual financial statements and household budget as guidelines. The total value of all your liabilities must now be deducted from the net value of your estate to determine its net value. If the net value of your estate exceeds R3,5 million it will be taxable at 20% for estate duty, with the exception of property left to a surviving spouse as this is exempt of estate duty and/or capital gains tax.
One pays capital gains tax on the growth in value of certain assets, for instance investments, fixed property or farms. The executor’s fee is something else you will have to pay. The executor is the person, financial institution or insurance company that you appoint in your will to administer your estate.
The Master of the Supreme Court must also be paid for the approval of your final estate accounts drawn up by the executor. There are also advertising costs because your death must be advertised in the local newspapers and Government Gazette so that all debtors can claim against your estate.
The transfer of fixed property and farms to heirs have many cost implications such as transfer duty and transfer, stamp, property valuation and mortgage cancellation costs. All these costs will arise after your death and will have to be paid in addition to the outstanding estate debt.
- Set goals ─ Put taking care of dependants first. The most important goals are the protection of your assets, the transfer of your estate at the lowest cost and the provision of sufficient liquid means for your estate to be transferred. Identify your heirs and stipulate what each one must inherit.
- Choose the techniques ─ There are various techniques for resolving estate problems. Only two are mentioned here, viz:
the trust inter vivos: A trust is a legal person just like a company. If you set up a trust during your lifetime, it is called a trust inter vivos. You can, for instance, put fixed property or an undertaking in trust (remember the costs) and manage it on behalf of an heir. After your death there are therefore no costs in this regard.
Testamentary techniques: You can draw up a new will. You can also set up a testamentary trust in your will that will be set up by the executor after your death.
Analyse the above-mentioned techniques with the help of planners and choose the most suitable technique for your estate.
- Implement your estate plan ─ Implement the techniques that you decided on in the previous step. Let your attorney draw up a will that indicates that a certain type of trust must be set up after your death. Consult your broker and take out a life-insurance policy for a specific amount.
- Revise your plan regularly ─ Estate planning is an ongoing process that has to be adjusted the moment any aspect of your estate changes.
Visit www.moneyskills.co for more information.
You can read more on the Law Society’s website at www.Issa.org,za.
This article is a general information document and should therefore not be used as legal or other professional advice. Always contact your legal adviser for specific and applied advice.