Structuring an estate plan

Tiny Carroll, Estate Planner, Glacier by Sanlam

It is estimated that you will spend 76 800 hours building your estate during your lifetime. If you don’t spend at least two hours planning it, you could waste up to one quarter of your estate on unnecessary expenses and taxes. In addition, your heirs / dependants may never receive what is due to them.

Estate planning can be described as the accumulation of wealth during your lifetime, the protection of that wealth against inflation, creditors, unnecessary taxes and expenses and finally the onward distribution of that wealth to the next and succeeding generations in accordance with your wishes.

This article looks at the six key steps in structuring your estate plan.

1. Identification of goals

A mistake that planners often make, is believing that estate planning is all about saving taxes. If this were the case estate planning would be easy - you could leave your entire estate to a public benefit organisation and you wouldn’t have to pay any estate duty. While this suggestion would make many public benefit organisations happy it won’t meet the needs of many estate planners. Estate planning must start with the evaluation of your personal goals and a determination of your wishes for the devolution of your estate. Once these goals have been established it is the task of the planner to structure the plan in such a way that you are able to pass as much of your estate as possible on to your beneficiaries by:

· Protecting your estate against insolvency and inflation

· Reducing any estate duty liability

· Reducing capital gains tax liability

· Reducing income tax liability

· Ensuring that there is sufficient liquidity in your estate to meet estate expenses and settle liabilities

· Ensuring the smooth and efficient administration of the deceased estate

It’s important to remember, though, that your plan should reflect your goals and what you’re aiming to achieve. The fact that it may employ clever planning techniques should not be the deciding factor.

2. Evaluation of the external environment

An estate plan cannot be drawn up in isolation of the external environment. One has to look at current legislation as well as consider anticipated changes and whether / how this will have a bearing on your circumstances.

For example, in the last two budgets SARS has indicated their intention to put an end to, as they described it, “the use of short-term trusts” also known as one-year-wonders. Clients who have based their estate planning on this type of arrangement may be liable for significantly more estate duty than anticipated. Planning should anticipate this type of change and provide an alternative structure or provide additional liquidity in an estate.

3. Evaluation of the estate assets

Having considered the client’s goals as well as the external environment, it is necessary to examine your estate assets. Is there sufficient liquidity in your estate to settle all debts on your death? Are there assets that should be channeled through a trust instead? For example, current low market conditions may provide an opportunity to transfer existing assets to a trust at a lesser capital gains tax cost. It’s also important to consider who your heirs are, what you’re leaving them, and how old they are. Another example would be that a farmer with considerable land interests can only leave his farm to one person, as the Sub-division of Agricultural Land Act prohibits agricultural land from being registered in the name of more than one person.

4. The formulation of a strategy to achieve those goals

With the above in mind it is time to formulate a strategy to meet your goals. The strategy will involve putting the underlying structures in place to assist with the accumulation, preservation and distribution of your assets. By setting up the necessary instruments, be it a correctly drafted will, or a complex structure involving multiple companies and trusts, you afford yourself the opportunity to give effect to the plan. Without these structures the opportunity is lost.

5. The implementation of the strategy

Bearing in mind that this is your plan and that it is designed to meet your personal objectives it is critical that you understand each element of it. It is not uncommon to deal with clients who have absolutely no idea of what certain sections of their will mean or trustees of trusts who have never read through the trust deed. Only once you understand each element of the plan and how it all fits together should you proceed with its implementation. Be careful of estate planning that is designed only to sell a life policy. A life policy may be absolutely critical to provide liquidity in the estate, but it is not an estate plan. Similarly, a document on its own is not enough, you need to implement the plan and update it on a regular basis. Estate planning is no magic wand and implementation may take years in some instances.

6. Ongoing evaluation and updating

An estate plan should ideally be updated on an annual basis to ascertain what steps can be taken to either implement, or improve on, the strategy. Your review could result in either major or minor changes to your plan. Minor changes may include changing the wording in your plan if, for example, the estate duty abatement amount increases due to legislation. A major change could be as a result of an event such as a divorce or the death of a spouse or planned emigration.