“Estates” – Only For the Rich?
Key Takeaways:
Estate planning is not exclusive to the wealthy; it benefits individuals of all financial standings.
Strategic planning secures assets, provides for dependents, and ensures wishes are honored.
Seeking professional advice tailors estate plans for comprehensive, accessible, and impactful results.
A well-planned Estate can benefit anyone with assets, but if you are regularly bolstering your wealth by acquiring assets like houses, cars, bikes, boats, jewellery or art, it’s advisable to discuss your Estate plan with an expert.
When one hears of someone’s “Estate” immediately episodes from Bling Empire – lifestyles of the fabulously rich and somewhat famous, flash before our eyes – oh when will Season Two come out?
We imagine vast homes filled with Gucci, Louis Vuitton, Chanel and jewels from Chopard and Harry Winston. Persian carpets and bespoke furniture. Rolls Royce’s and Lamborghini’s parked in the drive ways. Huge donations to philanthropic institutions. Vast wealth with investments in blue chip companies and properties strewn across the globe.
At least, that’s what I think about when I hear about someone’s “Estate”. Wealth and everything it brings.
When I look in my own cupboard filled with not a hint of Gucci or Chanel, I wonder whether the modest assets that I have accrued during my lifetime even qualify as an “Estate”? Surely you need a high net worth before it is even considered something as posh sounding as an Estate?
Firstly, what is an Estate?
In the financial and legal world, an Estate refers to everything of value that someone owns—such as all property owned, in and outside of South Africa (in cases where someone was ordinarily resident in the country), art collections, antique items, investments, certain insurance policies, annuities, intangible assets such as a patent or trademark and any other asset or entitlement.
A person’s ‘collection” of assets (less any debts on those assets) is also used as the primary way to refer to their net worth.
Net worth is the value of everything you own, meaning your financial and non-financial assets, minus your total outstanding liabilities (your debts).
But what are assets, in real terms?
An asset is a resource with economic value that someone owns or controls with the expectation that it may provide a future benefit.
Assets can be sorted into short-term (or current) assets, fixed assets, financial investments, and intangible assets.
But what are these?-
Current Assets - short-term economic resources that are expected to be converted into cash within a short period of time (such as one year). Current assets include cash and cash equivalents, accounts receivable, inventory, and various prepaid expenses;
Fixed Assets - long-term resources, such as equipment, property and buildings. An adjustment for the aging of fixed assets is made based on periodic charges called depreciation;
Financial Assets - investments in the assets and securities of other institutions. Financial assets include stocks, sovereign and corporate bonds, preferred equity, and other hybrid securities. Financial assets are valued depending on how the investment is categorised and how well the institution in which you hold stocks is performing, and
Intangible Assets - economic resources that have no physical presence. They include patents, trademarks, copyrights, and goodwill. Accounting for intangible assets differs depending on the type of asset, and they can be either amortised or tested for impairment every year.
But when is my “Estate” actually relevant?
Your “Estate” and the value thereof becomes particularly important in two situations – (1) if you declare bankruptcy and (2) when you pass away.
When an individual declares bankruptcy, their Estate is assessed to determine which of their debts they can reasonably be expected to pay. Bankruptcy proceedings involve the same arduous legal assessment of someone’s Estate that occurs when they pass away.
However, an Estate is most relevant upon death. Why? Well if set up correctly (and managed properly) your Estate will set out the division of your Estate and how your named heirs (known as beneficiaries) will inherit portions of your personal Estate.
Regardless of how modest your Estate may be.
But how do you plan for or manage your Estate?
Estate planning was once considered something that only high net worth individuals needed. But that has undoubtedly changed. Nowadays many middle-class families need to plan for when something happens either to themselves or to their family’s breadwinner (or breadwinners). After all, you don’t have to be uber wealthy to do well in the stock market or real estate, both of which produce assets that you’ll want to pass on to your beneficiaries.
Planning your Estate partly involves the drafting of documents and processes to be followed upon your death ensuring that your loved ones are properly taken care of. It is the act of managing your assets, which arguably represents the most important financial planning of your life.
Whilst not the only part of the process, the planning of your Estate involves the process of drawing up your Will which will explain your (as the testator) intentions for the distribution of your Estate upon your death. This will involve the nomination of beneficiaries and the appointment of your Executor to administer your Estate.
But the drawing up of a valid Will involves much more than just nominating heirs and appointing an Executor. Provision must also be made for the settling of debts, taxes and other related costs, in order to secure your family’s financial future. And these intricacies may need professional assistance.
Remember, as set out in our article Your Will is Yours to Make, without a valid Will, meaning you have passed intestate, the assets in your (now deceased) Estate will be distributed in accordance with the Intestate Succession Act 81 of 1987. This in essence means that with no valid Will to direct your Executor as to what you want to go to who, your estate will be administered and divided according to Section 1 (1) of the Intestate Act, either wholly or in part. And these rules of devolution may not be in accordance with your actual last wishes.
But, I’m single and have no assets, why do I need a Will or need to plan my Estate?
Firstly, you will have some assets – a bank account, a car, money in your pension fund, or even a claim against the Road Accident Fund. These are all forms of assets. Even if you have no spouse/life partner/children to worry about, you will still leave loved ones behind – like parents, siblings, nieces and nephews. Even your beloved fur baby. Whatever the case, someone will have to be involved in the winding up of your Estate and leaving a Will, makes the whole process less complicated and far less stressful on them.
What issues may affect my Estate?
As more fully set out in our article Death and Taxes, here are some provisions you should always keep at the back of your mind -
Estate Duty at a rate of 20% is levied on the net value of Estates that exceed R3.5 million and which fall below R30 million. Thereafter, all amounts above R30 million, Estate Duty will be levied at 25%. If duty is paid late, interest is charged at a rate of 6% per annum;
there are, however, many exclusions that could potentially apply which could reduce Estate Duty liability and it is important that all of these are taken into consideration during the Estate planning process;
allowable deductions from Estate Duty include debts, funeral and death-bed expenses, administration costs and fees on transfer of property to a surviving spouse. Deductions are also allowed for bequests made to qualifying public benefit organisations, and assets that are inherited by the surviving spouse (Section 4q deductions);
all persons are entitled to a Section 4A abatement (rebate) to the value of R3.5 million which may or may not be required to be utilised. In the event that the abatement is not utilised at the instance of the first death, a surviving spouse is entitled to an Estate Duty abatement of R7 million. Where the deceased had more than one spouse or a predeceased spouse, special rebate rules apply;
retirement annuities and pension or provident fund benefits (including lump-sums) are not considered to be “property” and will not be subject to estate duty nor form part of the Estate where there is a nominated beneficiary. Where the proceeds of the annuity investment are paid to the Estate, it will be subject to Estate Duty and Executor’s fees;
when a life insurance policy is paid out, the value of the pay-out is included in the value of the deceased’s Estate and it could, therefore, impact the amount on which the Estate Duty is levied. There are certain exceptions to this rule. It is important to note that endowment investments/policies (local and offshore) that are co-owned by the deceased is included in their Estate to the value of their share of such policy/investment and will, therefore, be subject to Estate Duty, although exempt from Executor’s fees, and
Capital Gains Tax is applicable to a deceased Estate in the same manner as it is applicable to individuals, with one exception to the general rule. The exception is that death is regarded as a deemed disposal of assets that is subject to capital gains tax, such as immovable property, shares, unit trust, etc. Exclusions would include a R2 million capital gain exclusion on a primary residence and a R300 000 death exemption.
Correctly calculating Estate Duty is a complex process with many additional factors which require professional assistance and advice by legal advisors, such as Benaters who are trained to successfully assist with planning your Estate and drafting your Will.
Ok, so when should I start the process of Estate planning?
A well-planned Estate can benefit anyone with assets, but if you are regularly bolstering your wealth by acquiring assets like houses, cars, bikes, boats, jewellery or art, it’s advisable to discuss your Estate plan with an expert.
Whenever this occurs.
Keep in mind that as a bare minimum, your Estate planning should take place at least once a year. This will entail sitting down and reviewing your previous plan to make any alterations based on income growth or asset acquisitions. A good measure is to review your Estate plan after any significant change in life circumstances or if you acquire new assets, part with existing assets or experience a knock or vast improvement to your income (as similarly set out in our article Wills - the Do's and the Don’ts, on how often one should update their Will).
So whilst we have illustrated that an Estate is not only for the posh, fabulously rich and somewhat famous individuals on Bling Empire, the process of planning your Estate, with its values, possible deductions and exclusions of various taxes (as discussed above) is complex and intricate. As with any financial type planning process (especially when it is possibly the most important financial planning process of your life), it is imperative that you consult with both a legal advisor as well as a financial advisor when considering your Estate planning process as a whole.
Get in touch with Benaters today to see how we can support you whilst you navigate your way through the (sometimes) rough seas that are Estates and their effective planning.
Written by Alicia Koch on behalf of Benaters