Death and taxes – make both more palatable with an estate plan
By Wouter Fourie (CFP®)
Death is inevitable, and so are taxes. But you have ample flexibility to decide how much you pay the taxman – and what your loved ones get to keep – after you pass away. The trick lies in planning your estate; literally creating a plan on what will happen with everything that you own or control, when you are drafting your will.
People often conflate the drafting of a will with proper estate planning. A will is a legal document and it gives your family and the executor of your estate a good idea of what they should do with everything you own. But to use an analogy: if your will is the final destination of all your assets, an estate plan is the roadmap on how to best reach that destination.
Every person who earns money should have a will and an estate plan. For one, you never know when you will pass away and even if you do not have dependants, you are still going to leave someone with the unenviable task of winding up your affairs, so have a will drafted.
Another benefit is that a will and especially an estate plan forces you to take stock of your financial affairs. We very often see people make significant changes to their lives when they take stock, assess their assets and debts and consider who they need to care for when they pass away.
For a start, you could download an Estate Directory, for instance the one we have listed for free on our website. This directory guides you through everything that you need to have in order when you pass away. This not only includes the big things, like your life insurance and pension fund details, but also small things like your social media passwords.
Once you have done this, you can structure your estate with the help of a Certified Financial Planner (CFP).
As part of your estate planning, you should structure your affairs to be tax efficient. This could include balancing your estate with that of your partner or spouse, to make best use of the combined tax breaks that both have access to.
You could also consider making donations, up to R100 000 a year, to reduce the tax burden at death and to grant usufructuary rights to family members to escape punitive capital gains tax (CGT) on the sale of your properties when you pass away. Remember, the taxman sees death as a capital gains event, so you will pay CGT on your assets before they are transferred to your beneficiaries or family, unless you plan ahead.
Estate planning could also include setting up a inter vivos or testamentary trust to care for your children or to prevent spendthrift family members from burning through your savings. Trusts can be a very efficient way of caring for your assets and your family after you pass away, but if you structure it wrong you may pay a lot more tax or even give up control of your estate or assets before you pass away.
When planning for your estate, you should also consider adding life insurance to fill any gap between your assets and your debts. Like any other monies that become available at your death, different types of life insurance have different post-death tax implications, so it is best to consult a professional when buying life insurance.
You should also consider the implications of your death on your business or any enterprise that you are involved in. Structured correctly, an estate plan and the right types of life insurance could help your family maintain control over your business and it could ensure, through the correct business insurance, that the business continues without you. Even if your family decide not to continue with your business, having the right type of insurance will at least provide value for your life-long efforts in building and establishing the business.
Ultimately, estate planning could be used as the most efficient way of taking stock of your current financial situation, help you plan better for the day of your death and even help you live better now. If you plan your estate well with the help of a professional, you will be able to grow your wealth more efficiently now and protect it better when you pass away.
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