Estate planning considerations for your client & your practice

Blended and extended families need wills, or dependants and partners won’t inherit.

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Most South Africans complete their annual tax returns regularly and pay tax when it is due, taking care of one of life’s two certainties. When it comes to the other – death, South Africans aren’t as diligent. An estimated 70% of South Africans don’t have a valid will, leaving their families and loved ones potentially without funds for living expenses.

Below we share why wills and estate plans are so important and show how you can help your clients draft and update these documents and plans.

Wills are one of the financial must-haves and a cornerstone of an estate plan

A will speaks for your client when they have passed on, and helps them to take care of their family and loved ones after death. Without a will, estates can take many months – often years – to wind up, leaving family members without any funds to pay for their daily expenses, including a home, food, transport, healthcare and education.

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Intestate succession is far from ideal 

The assets of estates where there is no will are distributed according to the laws of Intestate Succession. These laws follow a down, then up order when looking for beneficiaries and dependants. This means that first the spouse (by legal marriage only) and children inherit, and then the parents if there is no spouse or children. Siblings may also inherit in certain circumstances. This sounds logical and practical, and in some cases it is. But not all.

Intestate succession does not cater for blended and extended families
Thirty-four percent of households are classified as broadly extended in South Africa, according to Statistics SA, and nearly a quarter of children under 17 do not live with their biological parents. We are a nation of blended and extended families, with many families caring for children who are not blood relatives.

Intestate succession that focuses on blood relatives and legally married spouses does not cater for blended and extended families. For example, if your client cares for a child not related to them by blood, that child won’t inherit if the client dies without a valid will.

Time delays are common in intestate estates
Another problem with intestate succession is time. Intestate estates have to follow more processes than estates where there is a will. For example, the Master of the High Court has to appoint an executor (for estates valued over R250 000) and the executor has to trace and confirm all possible beneficiaries. This adds significantly to the time it takes to wind down the estate. The net effect is that dependants are left without funds, for at least a few months, placing them in a dire situation.

Sale of assets rather than transfer
Intestate succession may also result in valuable assets being sold, when the deceased would have preferred them to be transferred to a beneficiary. This is because without a will, an executor may need to sell an asset to make sure each confirmed beneficiary inherits something. This applies to personal assets and business interests.

Minor children may not be adequately provided for if intestate succession laws apply
Minor children (under age 18) cannot inherit, according to South African law. If they are confirmed as beneficiaries of an intestate estate, the assets due to them will be sold and placed in the Guardian’s Fund, earning a minimal rate of return, until they reach 18 years. Access to funds before this is limited, currently to R250 000 and any interest earned, and can be used for certain expenses only, such as education. This can leave children without the care a parent wished them to have.

Bottom line: Dying without a will can leave families destitute, and intestate succession may not cater for your clients’ nearest and dearest dependants. A valid will can prevent all of this. Advisers need to encourage and help clients to draft wills and update them regularly.

Estate plans help you and your clients deal with the practicalities of death and preserve generational wealth

A will’s main purpose is to name beneficiaries who inherit assets. A comprehensive estate plan is needed to take care of the many other practicalities of death, including:

Frozen assets and bank accounts
Assets and bank accounts are frozen as a matter of course and can leave families without funds to pay daily living expenses, often for months. An estate plan can make sure the family has enough cash or liquid assets they can use to pay living expenses while the inheritances and estate are finalised.

Specific requirements for distributing pension, provident and retirement annuity beneficiary payouts
Trustees of retirement savings funds are required to identify dependants and can distribute the proceeds to these dependants in appropriate allocations, irrespective of beneficiaries’ nomination. When you help your client with their estate planning, make sure they are aware of this, so they know which dependants will automatically inherit retirement savings. Your client can use this information to make sure their will names any other beneficiaries they want to inherit the other assets in their estate.

Life insurance beneficiary payout requirements
Beneficiaries named on a life insurance policy will be paid proceeds from a valid claim directly, which can be used to fund expenses while waiting for the estate to be finalised.

Debts
Debts don’t die when we do. Estate proceeds need to be used first to pay debts, after which the remainder is distributed to beneficiaries named in the will. Estate plans can ensure there is credit life insurance where applicable and enough life insurance to cover debts.

Tax planning
Estate duty tax and/or capital gains tax may need to be paid before assets are distributed. This can diminish an inheritance unless tax has been taken into account, tax efficient investments used, and funds set aside in the estate to pay any tax due.

Caring for minor children
Estate planning allows your clients to plan for inheritances to minor children in the form of testamentary trusts, which also allows them to specify an age of inheritance (for example, 21 or 25 years).

Wealth preservation
Your clients build their wealth with the intention of benefiting future generations in their family. They can take steps to ensure it is preserved when inherited. These can range from financial education, which includes learning about budgeting, debt and investing, to setting up trusts to manage the assets and distribute income to beneficiaries. As an adviser, you have a vital role to play in helping your clients’ generational wealth benefit their children and grandchildren. A will cannot do this alone – it requires additional planning.

Bottom line: An estate plan takes all the above factors into consideration to make sure your client’s beneficiaries inherit and are not left destitute while the estate is wound up or have to spend their inheritance paying taxes and debt.

Helping your clients with their wills and estate plans

Are you ready to help your clients with their wills and estate plans?

Wills are technical documents that most often need an expert hand, especially if minor children are dependants and/or beneficiaries of the deceased. Wills need to comply with all the regulations to be enforceable, and be signed by the testator and witnesses, all of whom have specific duties and rights. For example, a witness cannot benefit, in any way, from a will. They also need to be updated when a client’s circumstances change – for example, if they sell or buy a property or have children.

Estate planning may require a tax expert, attorney or fiduciary expert to make sure wealth is inherited as desired, taxes minimised and planned for, and wealth preserved in trusts.

Many brokerages offer the essential service of will drafting and estate planning services in-house or partner with a fiduciary expert who offers estate planning services. It’s a good idea to make sure you offer this service, as it not only enables you to offer your clients a more holistic financial planning experience, it may also be a potential source of new clients and revenue.

A conversation you must have with clients

Death, and planning for it, is frequently viewed as one of life’s hard conversations, one that many don’t want to have. Although clients have valid reasons for this, you need to broach the topic with them and emphasise that planning what will happen when they pass away is ultimately in their and their family’s best interests. .

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