RETIRE IN STYLE: Making sure that where there is a will, there is clarity, not chaos

In South Africa, if you die without a valid will, the law decides who inherits your assets. In other words, everyone has an estate plan – the question is whether it is your plan or the state’s.

A properly drafted will allows you to decide who inherits, and when and how they inherit. These decisions can also have important tax implications, as who inherits which assets can affect estate duty, capital gains tax and the overall cost of winding up your estate.

Your will is therefore more than a document saying who gets what. It is an important part of your financial plan and should be professionally drafted with both the legal and financial consequences in mind. I do not recommend that you do this yourself.

Think carefully about who inherits first

Consider Kate and Kyle, who have two adult children. Their plan was that if Kyle died first, half of his investments would go to the children and the other half to Kate.

It sounds reasonable, but it can have tax consequences. Assets left to a surviving spouse can generally pass without estate duty or capital gains tax being triggered at that stage. The tax is in effect deferred until the surviving spouse dies.

Any assets left directly to the children may trigger tax immediately. If the estate does not have enough cash to pay these costs, investments or property may have to be sold.

So, the question is not simply who should inherit, but whether the children should inherit on the first death or only after the surviving spouse dies.

Your will must survive your family

Families can behave very differently after somebody dies. Old sibling rivalries reappear. One child believes another received more financial help while the parent was still alive. A relative who has hardly been seen in years suddenly takes a keen interest in the estate.

I have seen otherwise functional families become deeply divided over an inheritance. Your will therefore needs to be clear enough to survive not only legal scrutiny, but also the family dynamics.

This is particularly important with ­second marriages, children from different relationships, businesses, offshore assets or unequal inheritances. In these cases, I would rather pay for a properly drafted will now than leave my family paying lawyers later to interpret what I meant.

Bank executor or private executor?

You also need to decide who will wind up your estate.

Banks have established estate departments, systems and continuity. The downside is that your estate may be one of many being handled at the same time. An independent professional executor may offer a more personal service.

Whoever manages your estate should work closely with your financial planner, who may already understand your family, investments and financial plan.

Neither option is automatically better. Ask the following questions:

• Are they experienced?

• Will they still be around when you die?

• Will your family be able to contact them easily?

• What will it cost?

Reduce the leakage before insuring it

I often see life insurance taken out specifically to provide cash for estate duty, executor fees and other costs. Sometimes this is exactly what is needed. An estate requires liquidity. But before buying insurance to pay the bill, first check whether the bill can be reduced by asking the following questions:

• Are beneficiary nominations correct?

• Are the retirement funds being used in an efficient manner?

• Are long-term investments held in appropriate structures?

• Could unnecessary costs or taxes be reduced through better planning?

This is where estate planning and financial planning should meet. The executor deals with the estate that arrives on the desk after death. The financial planner has the opportunity, while you are still alive, to help structure your affairs so that less money disappears through avoidable taxes, fees and delays.

What happens if you become mentally incompetent?

This is often overlooked in estate planning. Let’s suppose Kate is widowed and later develops dementia. Her investments still need to be managed and her bills still need to be paid.

The family may think a power of attorney will solve the problem. But an ordinary power of attorney generally falls away once the person no longer has the mental capacity to manage their own affairs. The document the family thought would solve the problem can stop working at exactly the wrong time.

A curator or administrator may then need to be appointed. This is why incapacity planning should be done while you are still able to make these decisions.

Your medical wishes matter too

A living will deals with something different. Your ordinary will deals with your assets after death. A living will, or advance healthcare directive, records your wishes about medical treatment if you can no longer communicate those wishes yourself.

This conversation should happen with your family and doctor while you are healthy. Nobody wants loved ones standing in an intensive-care unit trying to guess what you would have wanted.

Getting organised is the most treasured legacy

Finally, create what I call a “loved ones file”. It should tell your family where the will is, who the executor and financial adviser are, where investments and policies are held, and what properties and debts exist.

A good estate plan is therefore not simply about who gets your money when you die. It should reduce tax and cost leakage, make life easier for the surviving family members, protect you if you lose capacity and make your wishes clear while you are still able to express them.

The best legacy you can leave is not merely wealth. It is clarity. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to kenny.meiring@sfpwealth.co.za