WORDS ON WEALTH
The chances are remote, but if you died in a car accident on the way to work tomorrow morning, in what position would your loved ones find themselves? Would their grief at losing you be compounded by their frustrations in trying to unravel your financial affairs?
It’s Wills Week this week – an opportune time to broach uncomfortable questions and take necessary actions to ensure that your “house is in order” should the unthinkable come to pass. (Note: Until we discover the elixir of immortality, death will inevitably come to pass. The issue is whether it’s sooner or later.)
Making a will and taking other steps to ensure your loved ones are financially secure after your death constitute what is known as estate planning, an essential part of financial planning. The larger your estate, the more complex this process is likely to be, but even if your finances are relatively simple, there are many considerations and legalities that need to be followed. Let’s touch on a few of the main ones.
A valid will
Apart from your birth certificate, your will is probably the most important document you possess. Hilary Dudley, managing director of Citadel Fiduciary, says your will is the foundation for the transfer of your assets to your loved ones. The last thing you want is for it to be invalid because it does not meet the legal requirements or has ambiguities which create uncertainty. “Even with a valid will, the process of winding up a deceased estate takes at least a year, provided there are no complications like disputes, tax audits or assets that need to be sold. Queries around the validity or content of a will delay the process,” Dudley says.
Your will must name an executor to administer your estate. “Naming an appropriate executor is essential. An executor can be either an individual or a company represented by an individual,” Dudley says. “If you nominate an individual as your executor, consider nominating an alternative person who can step in if your initial nominated executor dies, loses their mental capacity, emigrates or is otherwise unable to accept the nomination.”
For the will to be valid, among other things it must be signed by two witnesses in your presence. The witnesses may not be beneficiaries of the will.
Liquidity in your estate
One thing that is often overlooked in estate planning is the extent to which cash may be tied up in assets that may be difficult or take a while to sell – if you intend them being sold at all. Before the executor can make distributions to heirs, anything owing to creditors and to SARS, as well as costs incurred, such as executor’s fees, must be settled. If there is not enough cash in the estate to meet these liabilities and costs, assets will have to be sold, and this could include, for example, the residential property that you intend to remain in the family. On top of the trauma of your death, your loved ones could be forced to leave their home.
So you need to have a fair idea of what your estate’s liabilities will be regarding costs, debts and tax owed and then ensure that you have enough in cash or in liquid investments to cover them. Credit life cover should be in place to cover large debts such as car finance and your mortgage bond.
Protection of minors
If you have minor children, your will must make provision for their care in the event of them losing both parents. Felicia Hlophe, legal adviser at Allan Gray, says you need to appoint a legal guardian; if you do not, one may be appointed by the High Court. “A court application can be a lengthy process, which could leave your children without a guardian for a significant period,” she says.
If you leave assets to minor children who do not have a legal guardian, these assets will be transferred to the government’s Guardian’s Fund, which will administer the assets until your children turn 18.
“Claiming from the Guardian’s Fund on behalf of a minor is an administration-heavy process and not ideal when funds are required immediately for your children’s needs,” Hlophe says.
One way of providing for minors is through a testamentary trust which, as its name implies, comes into existence on your death. “A testamentary trust has ongoing expenses as well as tax and legislative consequences and is not suitable for everybody. It is worthwhile seeking professional advice regarding the types of trusts that are available and their legislative and tax implications,” Hlophe says.
Immediate cash for your family
You also need to ensure that your family has cash to live on while your estate is being wound up – a process, as mentioned above, that can take a year or longer. Along with your bank accounts, most investments fall within your estate and are “frozen” on your death. However, certain financial products fall outside your estate and are almost immediately accessible. A life insurance payout can provide an immediate source of funding for your family’s day-to-day needs. An endowment policy – a type of investment product offered by life insurers – also pays out immediately to nominated beneficiaries (but still forms part of your estate for tax purposes). Finally, your savings in a retirement fund bypass your estate, although the payouts to beneficiaries and dependants may take longer to process.
WILLS WEEK
National Wills Week runs from Monday September 12 to Friday September 16. This annual initiative by the Law Society of South Africa (LSSA) encourages people to have a will by getting one drawn up free of charge at participating law firms. Go to the LSSA website (www.lssa.org.za) for a list of participating firms in your area.
PERSONAL FINANCE