Discover how a holistic estate plan can protect your assets, minimise tax burdens, and ensure financial security for your loved ones. File photo.
By: Alex Odendaal
Estate planning is often seen as something to be done later in life, but it plays a critical role in managing assets throughout one’s lifetime. A well-structured estate plan ensures financial security for loved ones, minimises tax burdens, and streamlines the administration process after passing away. Without careful planning, heirs may face unnecessary financial strain and delays in accessing their inheritance.
Liquidity is a key consideration in estate planning, as it ensures that debts, taxes, and administration costs can be covered without impacting the inheritance of beneficiaries, keeping in mind that SARS and the estate’s creditors are the first to be paid from a deceased estate before any remaining assets are distributed. If there is insufficient liquidity, assets such as a family home, vehicles, or investments may need to be sold to cover debts, which can leave dependants financially vulnerable. Careful liquidity planning can prevent this scenario by ensuring there are adequate funds available to settle liabilities.
Another essential aspect of estate planning is reviewing beneficiary nominations. Life events such as marriage, divorce, or the birth of children necessitate updates to beneficiary designations to ensure that assets are distributed according to one’s wishes. For example, minor children cannot inherit directly under South African law, making it crucial to establish a testamentary trust in a will to manage their inheritance. Similarly, the distribution of retirement funds is governed by Section 37C of the Pension Funds Act, which means that trustees, rather than the retirement fund member, determine how benefits are allocated among financial dependants. This may not always align with the individual’s intentions, highlighting the importance of ongoing estate plan reviews.
For parents of minor children, structuring an estate effectively ensures that their financial needs are met in the event of untimely death. Establishing a testamentary trust allows assets to be managed by appointed trustees until the children reach an appropriate age to handle their own finances. This arrangement safeguards assets, provides financial security, and prevents mismanagement. Without such provisions, a minor’s inheritance may be placed under the administration of the Guardian’s Fund, which could limit financial flexibility.
A well-prepared estate plan also simplifies estate administration, reducing delays and ensuring that the executor can efficiently wind up the estate. Ensuring that a will is valid and up to date, storing the original document securely, nominating a competent executor, and maintaining an estate planning file with essential documents can significantly enhance the efficiency of the process. These measures help to avoid unnecessary complications that could prolong the finalisation of an estate and delay inheritance payouts to beneficiaries.
Minimising tax liabilities is another advantage of estate planning. Estate duty, which is levied at 20% on estates valued up to R30 million and at 25% on the portion exceeding R30 million, is calculated on the worldwide assets of South African residents, making it essential to structure an estate in a tax-efficient manner. Certain assets, such as retirement funds (including pension, provident, and retirement annuities) and living annuities where beneficiaries have been nominated fall outside the estate and are not subject to estate duty. Further, domestic life policies can also be structured to provide for dependants while remaining free of estate duty, maximising the inheritance available to loved ones.
The structuring of growth assets is another important consideration in estate planning. Under the Income Tax Act, death is regarded as a capital gains event, meaning that an individual’s assets are deemed to be disposed of at market value on the date of death. A once-off capital gains exclusion of R300,000 applies in the year of death, but any amount exceeding this is subject to capital gains tax (CGT) at an inclusion rate of 40%, based on the deceased’s marginal tax rate. To mitigate CGT exposure, assets intended for future generations can be transferred to an inter vivos trust during one’s lifetime. In this structure, assets such as investment properties or business interests are owned by the trust, ensuring that all future growth remains within the trust and does not increase the dutiable estate value. When an individual sells an asset to a trust in exchange for a loan account, only the outstanding loan amount forms part of their estate, rather than the full market value of the asset. This significantly reduces estate duty and CGT liabilities.
Estate planning is not just about preparing for the inevitable; it is about making informed financial decisions that benefit both the individual and their heirs throughout life. By regularly reviewing and optimising an estate plan, individuals can protect their wealth, provide for their loved ones, and ensure that their assets are managed in the most effective way possible. As such, a holistic estate plan is a crucial component of long-term financial security, offering peace of mind that one’s legacy is preserved for future generations.
* Odendaal is an associate financial planner at Crue Invest.
PERSONAL FINANCE