Chapter 11: Protect your family, draw up a will

While we can never cheat death, by drawing up a will and doing some basic estate planning, we can ensure that we leave a legacy and not an administrative nightmare.

Several of this year’s Money Makeover candidates have young children and an important part of their financial journey has been to ensure that their children are provided for.

Understand your marital regime

When it comes to drafting your will, you need to consider the matrimonial property regime.

If the deceased was married in community of property, the surviving spouse effectively owns half the estate and only the half that belongs to the deceased can be bequeathed to the children.

If married out of community with the accrual, the accrual claim must first be settled.

Kavi Sigapragasan, financial adviser to Sandra, explains that, if one is married under customary law, the rules of community of property apply.

“This means that half of Sandra’s estate belongs to her spouse,” explains Sigapragasan.

Sandra could not leave her full estate to her daughter, and the couple would need to decide how to allocate joint assets such as her property.

There are many cases in which spouses may be estranged but not divorced. This can also apply to a customary marriage that has not been formally dissolved. The matrimonial property regime would still apply.

Life cover to meet future needs

For children: When there is a minor child, life cover can be used to provide for the child’s expenses should something happen to the parent.

As Sandra pays for a significant portion of her daughter’s expenses, Sigapragasan has recommended that she take out life cover to assist her spouse in providing for their daughter, especially for education and medical costs.

For debt: Life cover can be used to settle debt, especially for an asset such as property. There have been cases in which the life cover has been paid to a guardian with the expectation that they will use the funds to settle the debt.

However, the guardian is under no obligation to use the funds for that purpose. One should either make the estate the beneficiary, or take out mortgage insurance which pays the bank directly.

For estate fees: Quentin Gibbens, Absa financial adviser to Motsei, explains that, while Motsei has no debt, there would be estate costs – such as executor fees, master’s fees, burial fees, deathbed fees, transfer fees and tax – to be settled. Motsei has two properties that she wishes to leave her daughters. As these properties would need to be transferred into their names, conveyancing fees would apply.

For just R330 a month, Motsei would qualify for R1 million life cover, which would cover the costs of the estate and provide her daughters with an inheritance.

Testamentary Trust to protect your child’s assets

A testamentary trust can be used to protect assets for the use of your minor child until a specific age. It can also be used to provide for a disabled individual.

A testamentary trust only comes into effect on your death and has a special tax dispensation.

As Zinzy and her son’s father are not together, it is important that she create a testamentary trust in her will for her son.

She can then nominate a family member as guardian and have an independent trustee to ensure the funds are managed appropriately.

Sandra has made provision in her will for a testamentary trust for her daughter should both parents pass away.

The trust would hold whatever cash, investments or fixed property the daughter inherited until the age of 23.

However, one must consider the costs of maintaining the trust. A testamentary trust is usually only viable for estates worth more than R1 million.

Mpho intends to provide for his daughter’s future through life cover, but this may be best paid directly to her mother. However, as his businesses grow, over time it may become worthwhile to consider a testamentary trust to house his daughter’s share.

Update your retirement fund nomination form

Retirement funds fall under the Pension Funds Act and not your will. The trustees of the pension fund determine the beneficiaries, based on their legal or financial dependency. However, you should nominate beneficiaries to provide the trustees with a guideline.

Zinzy can specify that her son’s benefit be paid into the testamentary trust. In the case where there is no testamentary trust and the trustees of the pension fund are concerned about the financial management of a minor child’s benefit, they may opt to transfer to a beneficiary fund managed by the retirement fund. In the case of the Government Employees’ Pension Fund, this would be transferred to the guardian’s fund.

It is worth noting that, in retirement, a living annuity is a policy, not a retirement fund, and you do need to nominate a beneficiary.

SIDEBAR – BEQUEATHING PROPERTY

It is not uncommon for parents to leave the family home to their children. Yet, without a properly constructed estate plan and will, this legacy could create a financial nightmare for their loved ones.

The first determining factor will be the matrimonial property regime. There are many cases in which spouses may be estranged but not divorced. The matrimonial property regime would still apply, which means the surviving spouse effectively owns half the property.

If the property is not sold, it must be transferred into the heir’s name. It cannot remain in the name of a deceased person. As a parent, you should decide whether you leave the property to one child or share it equally among all children. This is an important conversation to have with your children. What if one child wants to live in the property and another child wants to sell it? Are all the children able to pay for the running costs or will it fall to only one child to pick up the bills?

As the property must be transferred, this is done by a conveyancing attorney and there will be costs involved. Can your children afford to pay for these expenses, or have you left enough liquidity/life cover to provide for the costs? There is also capital gains tax to consider when leaving assets to your children. Although a primary residence is exempt from capital gains tax up to the first R2 million of capital gains, any second property or investment property may attract capital gains tax and possibly estate duty if the estate is worth more than R3.5 million.

Be careful of trying to rule from the grave and putting too many restrictions on the assets you leave. You may specify in your letter of wishes that you would like the children to keep the family home, but do not prevent them from selling the property. It would be unfair to tie them to a property that may put financial strain on them.

It is worth having these conversations as a family, whether you are a parent or an adult child. The last thing you want is a legacy to create financial complications for those you love.

SIDEBAR – LEAVING YOUR BUSINESS TO YOUR CHILDREN

Motsei is bequeathing VIP Flushable Mobile Toilets equally to both daughters. “Motsei’s older daughter is involved in the business’ day-to-day management. However, both daughters will equally inherit the business. Motsei needs to ensure that her memorandum of incorporation clearly states how the two daughters should operate the business, with emphasis on decision-making,” explains Gibbens. The family should discuss how the daughter’s management of the business will be remunerated. What would a fair salary be?

SIDEBAR – PROTECTING ASSETS FROM MARRIAGE

You are allowed to stipulate in your will that the asset or inheritance be exempt from any marital regime your child may enter into. This means that, even if your child marries in community of property, the inheritance will not form part of the joint estate.

If you really want to get your finances in order, you have to start tracking your spending. If you cannot commit to that, it is unlikely you will be able to reach your goals.

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Absa Enterprise Development assists SMEs with access to business development support, markets access and access to funding based on certain criteria’s being met. For further information on Absa Enterprise Development you can email ed@absa.africa

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