Essential Financial Plan Contents

Life and Death - Don't Avoid the Hard Topics

One's own mortality is not a topic people often wish to consider. However, sound financial plan contents should include both financial considerations in your lifetime and personal requirements on your death.

So when the topic comes up at your next annual financial review, don't be tempted to rather consider pleasant diversions such as share price movements, investment returns, the weather or national sporting teams’ performances!

The reality is that ensuring your estate plan is in order usually provides great peace of mind.

Why is the ESTATE aspect of financial plan contents so important?

Your estate includes your liabilities as well as your your assets and failure to structure your estate adequately can have devastating effects on the financial position of your dependants.

Inadequate estate planning can lead to a cash shortfall, as not only may you need to settle all your liabilities, but you may be subject to estate duty as well. This could lead to a forced sale of assets, which is seldom profitable.

In the event of death, the estate’s capital needs will vary substantially. The source of funds to manage these capital requirements is irrelevant. All that is relevant is that there is sufficient funding in place to manage your dependants’ requirements.

What Estate Planning do I need in my Financial Plan Contents?

If you have dependants your financial plan contents should focus on life insurance, investments or assets. If you are a single individual without dependants you should ensure that you leave no family member responsible for your debts.

In estate planning, assets and insurance are inversely related: as your assets and investments increase over time, so your life insurance can decrease. It is inefficient to take out unnecessary life cover as this money could be better spent either on additional investments or settling debt.

However, most South Africans are underinsured when it comes to life cover. Life cover should be obtained at an early age, as when you are healthy you can buy life cover, and it is less expensive.

The amount of life cover can be maintained, or decreased, as your investments and assets grow. This should be assessed at your annual financial review.

What about Tax Liabilities after death? Do I need a Trust?

Your financial plan contents can significantly reduce your estate duty and capital gains tax liabilities. Such liabilities can be managed effectively years in advance by creating a well-formulated estate plan.

You may consider a testamentary trust or an inter vivos trust. A testamentary trust is established via a will, and comes into effect upon death. An inter vivos trust is established during an individual’s life.

As death is classified as a capital gains tax event, the benefit of a trust is that it reduces the overall estate of the individual and with it the estate duty and possible capital gains tax implications.

Unless your assets are bequeathed to your surviving spouse, they will be revalued at death and your estate is liable for capital gains tax.

However, by bequeathing the residue of your estate to your spouse — less the R3,5m abatement —and if the R3,5m abatement is bequeathed to a testamentary or inter vivos trust, the estate will have no estate duty liability. This is potentially a considerable saving.

Trusts can also be useful to minimise capital gains: by selling growth assets to a trust of which your dependants or children are the ultimate beneficiaries, any growth in these assets will occur within the trust, and therefore be excluded from your estate. This removes capital gains tax considerations from your estate; however, capital gains tax will apply to the trust on sale of the asset.

Trusts may be warranted where the beneficiaries are financially irresponsible or naive as the trustees will have the ability to control and monitor the use of funds housed in the trust. Trusts can also be useful in providing asset protection against creditors.

What about Costs?

Trusts DO carry costs, and these must be factored into the overall financial plan contents.

The costs include compliance with legal and tax legislation and also trustee costs, and may place limitations on access to the assets.

Consider also the capital requirements of your beneficiaries: as a general rule, R1m will provide a family with R5 000 a month for 20 years, growing with inflation.

Use this as your basis for your estate planning requirements.

While the above outlines possibilities for planning your estate, you should always seek the advice of an independent lawyer, accountant or fee-based certified financial planner who is focused on your best interests and can provide impartial advice.

Debbie Netto-Jonker, CFP, is founder of Netto Financial Services and was Financial Planner of the Year in 2001.