Dying without having a valid will is a sure recipe for family conflict. Yet, according to statistics from the High Court, 85% of South Africans do not have a valid will.
Unless you are part of the 15% who do have a will, National Wills Week, which takes place from 16 to 20 September, is a good opportunity to draft a will to ensure your assets are divided among your loved ones in the best way possible.
Marnus Mostert, franchise principal and a Certified Financial Planner® at Consult by Momentum, challenges South Africans to think carefully about the question: Can I afford to die?
“It sounds like a strange and dark question, but the reality is that many of us are ill-prepared for death. While no one likes to think about dying, the reality is that if you do not make provision, those you love most in the world will suffer the consequences of your lack of preparation.
“Every person needs to have a clear and legally sound will in place, and should also have some form of cover, such as life insurance, to help cover the expenses associated with death, as well as leave something behind for their families,” Mostert says.
What do you want to happen?
Should the worst come to be, what are your wishes? What do you want to leave for your family? What will become of your assets? These are all questions that you need to ask yourself – and once you know the answers, these need to be clearly laid out in a last will and testament.
Having a will ensures that your assets are distributed according to your wishes after your death, preventing family disputes and ensuring that loved ones are provided for. In South Africa, without a valid will, your estate will be distributed according to the laws of intestate succession, which may not align with your intentions.
Mostert says your will needs to:
- be in writing;
- nominate your beneficiaries;
- nominate guardians for minor children;
- appoint an executor to manage your estate;
- specify how your assets should be distributed;
- specify if you want to be cremated or buried and whether you are (or want to be) an organ donor;
- make provision for a trust, if required;
- nominate trustees; and
- be co-signed by independent witnesses to ensure compliance with the law.
Although there are free online tools to help you draw up a will, it is worth the money to have it drawn up by a professional, such as your financial adviser or lawyer.
“There are specific requirements involved in drawing up a will, as well as its signing, and if you fail to adhere to these, you risk your will being contested or deemed invalid,” Mostert says.
“A professional helps you to consider things like tax implications, various methods to cover estate fees and other associated costs, as well as the liquidity of your family on your passing, helping to keep food on the table and having the cash at hand to pay creditors.”
Taxes on death
The common estate administration fees in South Africa typically consist of executor’s fees (up to 3.5% of the estate’s value excluding VAT), conveyancing fees, advertising fees, Master’s fees, other miscellaneous taxes and estate duties (20% on the first R30 million and 25% on the dutiable value of the estate above R30m).
“These fees can significantly reduce the assets left to beneficiaries, especially if the estate isn’t liquid. A lack of planning for these costs could force beneficiaries to sell assets such as properties or investments to settle the fees, which could diminish the estate’s value or impact the family’s financial security,” Mostert says. This is why sound financial planning is important.
Covering the costs
There are a few avenues ensure money is available to cover these costs, and that your family are not financially impacted. One of the best ways to ensure sufficient cashflow to cover these administrative expenses is to have a life insurance policy in place, Mostert says.
“Life insurance provides financial support to a family after the policyholder’s death. It offers the necessary liquidity to settle fees and taxes, while also covering any debts you may owe, as well as ensuring the living expenses of your family are met.
“Consider the amount of coverage needed, who your beneficiaries will be, and the affordability of your monthly premium. It’s essential to align the insurance benefits with the overall estate plan to avoid liquidity issues. For instance, if the estate requires liquidity to settle debts, the beneficiary should not be another person but rather the estate. Consulting a financial adviser will help you to distinguish between what the estate requires and the needs of the beneficiaries,” Mostert says.
Nominate beneficiaries for annuities
One of the ways you can reduce the taxes and fees on a deceased estate is by nominating beneficiaries for your investment portfolios, specifically retirement structures such as living annuities and retirement annuities, says Ruan Breed, a financial adviser at Brenthurst Wealth.
Where you nominate a beneficiary for a living annuity, the beneficiary has the option to receive a lump-sum payment or to continue receiving an annuity. Where the lump sum is selected, the lump sum will be subject to income tax (as if it had accrued to the deceased the day immediately prior to his or her death).
Breed says when no beneficiary is nominated for a living annuity or retirement annuity, the proceeds of the investment will be paid to the annuitant’s estate after the relevant taxes have been deducted, which can be as high as 36%.
Executor’s fees will apply because the asset will form part of the estate, which will have a detrimental effect on the overall portfolio value. The executor will have to decide where the portfolio’s proceeds will be allocated, according to the annuitant’s will, which will attract executor’s fees.
Breed says a further drawback of not having a nominated beneficiary is the time it will take to finalise the transfer of the investment to the beneficiaries.
Distributions can take place only after an executor has been appointed by the Master of the High Court and after the final distribution account is submitted. If all goes well, this will happen after about six months, but it can take much longer – in some cases, years, Breed says.
“This becomes an even bigger issue when the annuity is a very large part of the investor’s overall wealth, and this is where issues in terms of liquidity creep in. Where beneficiaries opt to invest their proceeds into a new living annuity, no retirement taxes will apply.”
Breed says it is important to consult your financial adviser to ensure you have nominated beneficiaries on your annuity investments to protect your wealth. It is also important to discuss the implications of how beneficiaries want to receive the proceeds on your living annuity, because this will have a big impact on the successful transfer of generational wealth.
Where should you start?
The best way to start with drawing up a will is to consult a financial adviser who can guide you through the process. List your assets, debts, and beneficiaries and consider your family’s future financial needs.
A professional can assist in drawing up a legally binding will and ensuring that your life insurance and other financial planning aspects align with your estate plan and any other goals for your family, such as education.
Disclaimer: The information in this article does not constitute financial planning, estate planning, legal, or tax advice that is appropriate to every individual’s needs and circumstances.
