We have written various articles on wills and death before. Why? Because, as we have seen over the years, it is complex, especially when winding up estates. It is not enough to draw up a will and take out life cover. Estate planning requires thought and careful consideration because every family is unique and each has its own complexities and challenges to address. If estate planning is not done, it often leads to unintended and sometimes devastating consequences.
Draw up a will
The importance of this document cannot be overstated. When dying without a will your estate gets devolved according to the Intestate Succession Act. This means your estate will be divided amongst your surviving spouse, children, parents, or siblings according to a set formula. This process is handled by the Master of the High Court and is a very long, slow process. To avoid this, make sure your intentions are clear in a recent, signed, and witnessed will.
Outdated and incomplete wills
A will should be updated and changed with big life transitions such as the birth of a child, marriage, and divorce. These events may have a significant impact on how you would like to distribute and divide your estate. This is especially important in the case of divorce, as divorce does not automatically invalidate a will where an ex-spouse is mentioned. If there is a second marriage, the situation can be complex with various family members needing to be considered – members who may not see eye-to-eye. Make sure you are clear about your intentions and that all affected persons know what those intentions are.
I recently lost two clients. In the first case, the client died unexpectedly and in the second case, the client was frail and ill and did not have the energy or emotional capacity to think about her financial affairs. Both clients had updated their wills but had not signed the latest copy. Thankfully, in both cases there were only minor changes in the new will and the family could proceed with the older version - but it could have been a disaster. It’s crucial to confirm any changes as soon as possible with a signature.
When to draw up an offshore will
Our colleague Michelle le Roux, CFP®, FPSA® recently wrote a detailed article on offshore wills. Some jurisdictions will only take instructions with an originally signed will, especially if property is involved. In other jurisdictions, like Portugal for example, a will is not needed as specific testation laws apply. Because each jurisdiction is different we seek specialist advice for our clients who have assets in various jurisdictions.
Nominate beneficiaries on all retirement plans and policies
For all retirement plans and policies, beneficiary nominations are necessary. However, the pay-out processes may differ.
Here is a quick reference:
All retirement vehicles (Pension, Provident, Preservation, Retirement Annuity).
On your death the trustee of the fund is obliged, by the Pension Fund Act, to confirm that you nominated your dependents as beneficiaries. They will not make payments before this is confirmed and have the authority to override your beneficiary nominations if they are unable to confirm this.
When drafting your nominations, consider who may be regarded as a dependent. If you leave out someone who could be regarded as a dependent, the trustees may need to change your nomination.
For example, if a child from a previous marriage is dependent on you for maintenance, but you decide to leave your pension fund to your current spouse, the trustees of the retirement fund may decide to award a portion of the fund to your child. They will take your will and other policy nominations into account in making that decision, but the outcome is uncertain.
On your death the value of the living annuity will be paid to the nominated beneficiaries. A Living annuity is not regulated by the Pension Funds Act, but by the Long-Term Insurance Act. The life company is obligated to pay the proceeds of the policy to these beneficiaries - no questions asked. It’s therefore important to make sure your beneficiaries are correct and updated, especially after a big life transition.
Living annuities offer a great way to get assets to a loved one fairly quickly. Recently, we helped a woman who had inherited her husband’s entire estate but had no immediate source of income. She only had a small amount in her bank account. If not for the living annuity she would have been in trouble. It has been almost 3 years now and she is still waiting for assets to be transferred into her name due to the process of winding up the estate taking so long.
On your death the value of the endowment will be paid to the nominated beneficiaries. As with a living annuity, the life company will not question the beneficiary nominations. It’s therefore important to make sure your beneficiaries are correct.
You may nominate minor children or trusts as beneficiaries on any of the above.
Consider your estate’s liquidity
On your death, there are many expenses payable such as estate duty, capital gains tax, executor’s fees, and funeral costs to name a few. Make sure that your estate can pay these expenses from cash reserves, liquid investments or proceeds from life policies.
Illiquid assets make it difficult for the estate to cover the costs, which can force an executor to sell a property the family may have intended to keep. Farmers are a good example of this.
The same applies to entrepreneurs and small business owners who often build and reinvest their wealth into the business. This is not necessarily the wrong thing to do, but it does have estate planning and risk consequences, like:
- Building wealth in your business ties you to an asset that may be illiquid. Think about what might happen to the value of the business if you died? It makes better sense to extract value from your business over time to help build your own financial independence.
- The value of the business may be closely linked to you as an individual. If you die, the business may be worth little to nothing. If this is the case, how can you support your family in the event of your death? Sufficient life cover may be an important consideration here.
- If there are various shareholders in the business, do you have an agreement in place that states what happens to each shareholders’ shares in case of death? Is there an option for other or existing shareholders to buy the shares from your estate? It might be important for your family to keep the shares or for them to receive proceeds from the sale of the shares. For the latter, a Buy-and-Sell policy may be a suitable solution.
Access to information
I’ll leave you with a few questions to think about. If you die…
- Will your loved ones know where to find a copy of your will?
- Do they have a copy or access to a copy of your assets and liabilities?
- Do you have a trusted advisor that needs to be contacted, and if so, does your family know this person?
- Have you spoken to your family about personal sentimental assets such as art, jewellery, or air looms and how they should be split?
- Does your family know if you would like to be buried/cremated and how you would like to be remembered?
- Does your family know where to access passwords that they may need for electronic records?
If you find it hard to talk about these things, you can write a letter of wishes to your family and attach it to your will.
There are some important considerations when you have minor children that should be addressed in your will:
- Who the children’s legal guardian will be if both parents died.
- If you leave all assets to your minor children, the guardian would manage affairs on their behalf until age 18. Would you be comfortable with this?
- You can leave the assets to a testamentary trust if you want more control over how the children’s affairs are managed. In this case, you can choose at what age the children can access the funds. Many parents feel that 18 is too young and choose to dissolve the trust later. Trusts don’t necessarily need to be dissolved.
- Appoint at least 3 trustees to oversee and administer the trust. We recommend appointing an independent professional trustee, the guardian and one other person familiar with the children and the family that will act in your children’s best interests.
There is one important implication with testamentary trusts that many don’t realise - a testamentary trust (like all South African trusts) cannot hold direct offshore assets. Therefore, if you leave your estate to a testamentary trust and you own assets directly offshore, they would be sold and repatriated. For many, this is another example of unintended consequences.
You can address this by drawing up an offshore will and using foreign “bottom drawer” or “freezer” trusts.
A living will can help your family make informed decisions when faced with difficult and life-altering situations. Recently a Foundation family experienced the complexities of withholding and withdrawing care from a parent on life support. It was hard to watch the family agonising over that decision and it reminded us of the importance of a living will.
Medical professionals will guide and support the family as much as possible but will ultimately look to the family to make the final decisions. It can be traumatic and damaging to relationships if everyone is not in agreement, and this typically happens when there is no living will or understanding of the dying person’s wishes.
Appointing an executor
You might want to appoint your children or spouse as the executor of your estate. This is common and there are various reasons for this:
- You might trust them to do a good job.
- You might think that it would be an honour for the person to be appointed.
- You may want to save on the executor's fees (assuming the appointed person doesn’t charge the fee to which they are entitled).
Whatever the reason, we recommend you only do this if the appointed person has sufficient experience in winding up estates, as it can be a stressful and complex project to take on. We recommend appointing an experienced professional who understands the process and has a good working relationship with the Master’s office and SARS.
The Master’s office is notoriously slow, and it can take years for an estate to get finalised. Save your family the hassle and get a professional to help. Executors’ fees typically range from 0.5% to 3.5% depending on the size of the estate and can be negotiated beforehand.
Talk to your family
We often avoid clarity because we tell ourselves that we are being kind and we are protecting our family, but the lack of clarity leaves space for misinterpretation and hurt. We therefore must make sure the following boxes are ticked:
- All legal documents and beneficiary nominations are correct.
- Your family know where to find all information, but also look at the information together so that everyone knows who gets what.
- Consult with specialists when dealing with additional complexity such as foreign assets, minors, and business structures.
It is not easy to plan for, and talk about your death, but the more transparent and clear you are about your intentions the more it empowers your family. As author Brene Brown often says, “Clear is kind. Unclear is unkind”.
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