A CRITICAL ANALYSIS OF THE IMPORTANCE OF EARNEST ESTATE PLANNING

1. CHEAP ADVICE

All too often people ask me to have a quick look at their Will just in case it needs updating. It has been drawn for free or at a reduced cost by a friendly bank or the like. Time and again it needs more than up-dating; it needs to be completely redrawn. I was recently proudly informed by a Seminar participant that he had a Will drawn for substantially less than the fees I had quoted. I responded that it struck me as weird to spend a lifetime sweating to secure assets for retirement and thereafter for children to inherit but for the sake of a few thousand rand, not to obtain expert help to ensure that the assets were safeguarded on death in the most tax efficient manner.

2. SILLY OMISSIONS

Likewise a client sought my views on his and his wife?s will which appeared to have been skillfully drawn in that it contained a number of complicated provisions seeking to obtain every possible deduction, plus a few. I pointed out that some of the provisions were likely to be ignored by SARS as being artificial, that the Will failed to provide for what would happen in the event of the pre-decease of one of their two young children and that, critically, neither had appointed the other as heir or any heirs except if they both died at one and the same time! It is easy enough to get a Will drawn for nothing or at a bargain basement price. Adverts abound in this regard. What is not easy is to obtain a Will created through a sound knowledge of complicated fiscal and tax laws and to be 100% sure that this has occurred.

3. EXPENSIVE MISTAKES

Typically I am told by client that when the Will was drawn they had made it clear that they wanted to leave everything to each other and thereafter their children. The Will drafter faithfully complies with this promptly losing the primary deduction of R2.5m in the first drying?s Estate. In bequeathing everything to the surviving spouse the Estate assets pass on duty free but the surviving spouse?s Estate will pay additional Estate Duty of up to R500 000. A simple provision whether by creating a Testamentary Trust or a Usufruct or leaving assets to children directly would allow the Estate of the first dying to benefit from the deduction and save ultimately up to R500 000.

4. CGT BEGINNING TO BITE

South Africa has joined the real world with appreciating and expensive property. As little as 10 years ago if the value of one?s house over 10 years had doubled one felt a warm glow. Over the last four to five years the value of residential land has tripled in South Africa. From all of this SARS draws great reward on death. CGT is now beginning to bite and be understood. In essence on death assets are subject to taxes and duties in the region of 28% before allowing for various deductions. On the basis of recent appreciation of property, over the next 15-20 years the dutiable figures involved will become serious money, even for the average man on the street with only a residence to his name.

5. BUDGETARY PERCEPTIONS

In the last Budget, Manuel increased the Estate Duty deduction from R1.5m to R2.5m, the message clearly intended being that using Trusts to avoid Estate Duty and CGT was now unnecessary. A simple example will show the fallacy of this. Take, for instance, a property already owned by an individual worth R1m on which transfer duty of R80 000 would be payable if transferred to a Trust. Take it that the owner dies 12 years later when the property is worth say R5m equating to a total CGT and Estate Duty liability of approximately R700 000 (and allowing for all deductions). Compounding the sum of R80 000 (the putative transfer duty) by say 8% a year for 12 years would give a lost opportunity value of R200 000 on which CGT and Estate Duty would equate to R55 000 all in. Thus had the transfer to the Trust taken place, an additional amount of R645 000 would have been left in the hands of the owner?s family! If one took for instance a more realistic value of say R8m, the saving would be approximately R1.5m. Add to this that whatever is lent to the Trust to buy the property can be reduced by donations of up to R50 000 a year, that the lender?s Estate is likewise lessened for Estate Duty and CGT purposes and you have a winning investment strategy that?s Good for You (and your descendants!)

6. FIX-IT

I cannot therefore stress strongly enough how important it is for individuals to make sure they have a sensible and tax efficient Estate strategy. Even if you think you have one it does no harm to take a second opinion! With the ever increasing complexity and continual changing of tax legislation critical issues may not be dealt with and deductions not provided for. You will only have yourself to blame, but by then it will be too late!