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Your will holds your wishes, but be careful what you wish for

Sep 27, 2013

When you die all your assets such as your bank account and investment policies are frozen and will only be released once the estate has been finalised. If you do not have a will this can take years to resolve.

graveyardSorè Cloete, Legal Manager at Old Mutual recently dealt with a case where the provisions of the will inadvertently resulted in the surviving spouse having to pay money over to his young children.

In this particular case the couple was married out of community of property with accrual. “The accrual system states that upon death or divorce the difference in growth of the accumulated assets must be divided equally between both marriage partners,” explains Cloete.

In this case the wife had left all her assets to her children in her will. What she had not realized is that her assets included fifty percent of her and her husband’s combined estate. “As her husband’s net worth was greater than hers he had to pay money over to her estate even though he was the legal guardian and would be raising the children” says Cloete.

When writing up your will you need to consider not only the implications in terms of your marriage contract but also how your wishes will be interpreted.

For example there was a case where a father had created a family trust on his death with the stipulation that only grandchildren born of his daughter could become beneficiaries of the trust. If she did not give birth to a child then his son’s children would become the sole beneficiaries. This was obviously intended to prevent any step-children from inheriting; what he had not envisaged was that his daughter would adopt a child. Legally the adopted child had no claim on the trust and the son’s children were entitled to the entire estate.

While a will can be a very simple matter, you need to realise that as your estate grows and you get married and have children, there are many legal and tax implications you need to consider.

Checklist for your will

Your will needs to make sense so keep it simple. Make sure it is written in a way you understand. Many people make the mistake of trying to rule from the grave which complicates the will and makes it difficult to execute.

Retirement fund trustees can over-rule your will

It is important to note that your retirement funds are dealt with separately to your will as this falls under the Pension Funds Act which requires that your retirement funds are paid out to your financial dependents. This can include minor children from another marriage or a former spouse if you are still paying maintenance. Your life cover will also be paid out to whoever you have stipulated as the beneficiary in the policy.

Your will needs to specify what happens to your assets such as your house and savings as well as what happens to your dependents.

Nominate an executor

The executor is the person who is responsible for administering the estate. By nominating this person in your will, you prevent an unnecessary delay to the administration of the estate. If no executor is appointed, the Master of the High Court must appoint an executor.  Such appointment will take place with the involvement of the estate’s beneficiaries and creditors.

Nominate heirs

You need to decide who you are leaving your worldly assets to; this can become more complicated if you have young children. There is no estate duty payable if you leave your estate to your spouse so you could decide to leave your full estate to your spouse which he or she would use to help provide for your children. This would be the simplest solution as it does not require any special structure to house the funds for minor children.

How your marriage contract affects your will

If you are married in community of property your spouse is entitled to 50% of your estate – therefore, you can only hand down your share of the joint estate. If for example you are married in community of property and in your will you leave all your assets to your children from a previous marriage, your new spouse would first have a claim on fifty percent of those assets.

Couples married under the accrual system may also need to cater for a possible accrual claim against their estate as was the case with the client mentioned above. If for example the majority of the assets are held in the husband’s name, should the wife die her estate could have a claim against her husband’s estate.

Your tax abatement can roll over to your spouse

A deceased estate is given a tax abatement which is currently set at R3 500 000.  Therefore, estate duty would only be payable if the net estate is more than R3 500 000.

There is no estate duty payable if you leave all your assets to your spouse, therefore any portion of this abatement that is not used is added to your spouse’s estate. If your estate does not use any of the abatement on your death then when your spouse dies his or her estate would not attract estate duty on the first R7 million. This effectively means your spouse could leave up to R7 million to your surviving children tax-free.

Alternatively you could take advantage of the tax abatement, where no estate duty applies on the first R3.5 million of your net estate, and leave money directly to your children tax-free. This could ring-fence money for your children should your spouse re-marry. You would need to take into consideration that your marriage contract could limit how much of your estate you are able to leave directly to your children.

Nominate a guardian

If you have young children you need to stipulate what will happen to them if both parents die. This is also an important requirement for single parents.

The Children’s Act requires you to nominate a guardian to any minor children should both parents die prior to their children reaching the age of majority. You can include a letter of wishes as to how your children should be provided for but be careful of ruling from the grave. For example if you have left sufficient finances, you can stipulate that the children must belong to a medical scheme and what type of schooling they should receive; it would however not be helpful to include curfew times and that they are not allowed to smoke! You need to appoint someone you trust to raise your children to the best of their ability.

Decide on a testamentary trust

You need to decide if the inheritance would go straight to the minor children or into a trust. If left to the children the money would be essentially administered by the guardian. You can select to house the funds in a testamentary trust, until such time as the child attains either the age of majority, or some other age pre-determined by the parent – the average age is 25. A testamentary trust is a trust that is formed upon your death and your will must include the provisions for this trust, which must  include the appointment of the trustees. The child’s guardian does not necessarily have to be the trustee; in fact, it is often a good check and balance to have a separate, independent person as trustee who is financially astute.

It is important to note that if you do not form a testamentary trust the trustees of your retirement fund could elect to have the children’s portion of your retirement fund paid to the Guardian Fund which would then provide an income each month to the surviving spouse or guardian to provide for the children.

Protect your children’s inheritance

Ensure that your will contains a clause that any assets left to your children would not form part of that child’s matrimonial regime. If for example you left a property to your daughter who then gets married in community of property, including this clause in your will would ensure that the property will not form part of your daughter’s joint estate.

Nominate an alternate heir

Include an alternate heir, as the person you nominate as your heir may be deceased.

Know where your documents are

There is no point in having a will if no-one knows it exists or where to find it. It is advisable to keep your original will in either a safe or a secure place and then also have a copy of your will kept at a separate location. If you have a financial advisor ask them to keep a copy on file. Alternatively the person who drafted the will may keep a certified copy. Make a list of people or institutions to contact in the event of your death – your financial adviser, broker, medical aid and so on. List your bank accounts, policy numbers, investment details. Make sure your family knows where to find this information.

Small estates don’t need an executor

If you have a very simple estate of less than R125 000 you do not need an executor and you can have a simple will stating your wishes.

The Master/Magistrate will issue letters of authority in terms of Section 18(3) of the Administration of Estates Act which allows for a less formal and easier process for the winding up of the estate.  If an estate has a value of less than R50 000 it can be reported at a Magistrate’s Court and a more streamlined process will be followed. You can write up your own will – just make sure it includes all the relevant information and that it is signed by two witnesses.

Selecting your executor

The executor is responsible for administering and distributing the deceased estate according to the wishes of the deceased, as well as the requirements set out in the Administration of Estates Act.

You can nominate anybody as an executor but it is important to realise the duties imposed upon the executor. Therefore, you should nominate an executor who is competent to carry out these duties. If you nominate a family member as an executor they can in turn appoint a  professional to assist them in winding up the estate.

If you appoint a professional executor in your will you have an opportunity to negotiate the fees upfront rather than leaving it to your family who may be emotionally vulnerable at the time. An executor is entitled to be remunerated up to a maximum of 3.99% (inclusive of VAT) of the value of assets that the executor actually administers.  This fee is negotiable depending on the complexity of your estate. (It is worth remembering that any life cover with a beneficiary nomination does not form part of the  estate upon which the executor may charge fees, as it is paid directly to the beneficiaries without the intervention or assistance of the executor).

Information provided by Tristan Naidoo, legal advisor specialist at Old Mutual

2 Comments

  1. Gooday Maya

    I have a question regarding the R7 million tax rebate on the estate of the second spouse

    Upon the death of the second spouse, does the rollover of the allowable tax rebate of R3500 000 or part thereof also apply to couples if they are married in community of property?

    Thanks in advance.

    Thanks

    Reply
    • Dear B King,

      If at the death of the first dying spouse, the survivor is the sole beneficiary of the estate, the full R3.5 million will roll over to the survivor’s estate even if they were married in community of property. The Estate Duty Act reads that the estate of any person qualifies for the R3.5 million deduction. (a total of R 7 million on the second estate)

      Reply

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Maya Fisher-French author of Money Questions Answered

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