First published in the Daily Maverick 168 weekly newspaper.
Answer: If you die without a will or your will cannot be found, then you are said to die intestate. When this happens, the state will divide up your assets according to a particular formula. This formula may not suit the needs of your parents.
For example, should your father die, leaving his wife and three adult children, his assets would be split equally according to the rules of intestate. Your mother would therefore inherit only 25% of his assets, with the rest going to each of the children.
I would strongly recommend that your parents draw up a will. There are many companies that will do this for free. They will even offer you safe custody for the will if you make them the executors. If you need assistance, I can refer you to a few companies that offer this service.
There are three major costs that need to be dealt with when someone dies. These are: capital gains tax; executor fees; and estate duty.
If you do a bit of forward planning, you can reduce what is paid here.
Capital gains tax
When you die, a capital gains tax event is triggered. You are deemed to have sold all your assets on the date of death. If it makes sense financially, you should start moving some of your assets out of your estate. There are a few strategies you can follow:
Donations – you are allowed to donate R100,000 a year. A lot of people use this to fund tax-free savings plans for their children and grandchildren.
Retirement annuities – you are allowed to contribute 27.5% of your taxable income to a retirement annuity. The money contributed takes the funds out of the capital gains tax net and also out of the estate duty net, because retirement savings do not form part of your estate.
Executors charge 4% including VAT to administer an estate. If you can keep something out of their ambit, then you should.
A simple way to reduce executor fees is to ensure that all your policies have nominated beneficiaries on them, rather than be payable to the estate. If you do this on a policy that pays out R1-million, you will save R40,000 in executor fees. It is really worth the effort.
If you have assets worth more than R3,500,000, then you will be liable for estate duty. This number is surprisingly easy to reach when you add in the value of your home, car, household assets and insurance policies.
Paying the capital gains tax, executor fees and estate duty can place a massive financial strain on a family. They may have to sell assets to pay these amounts.
When I do annual financial reviews with my clients, I like to calculate these costs. This helps us to identify any inefficiencies in the financial structures. We can then take active steps to remedy the problem.
In addition, we can make sure that there is sufficient liquidity in the estate to pay these costs. You do not want to sell assets that have sentimental value. If you are healthy, then a life insurance policy is a very simple way of removing this liability.
To summarise my answer to your query: It is vitally important that your parents draw up a will and have it stored in a safe location.
Your parents will not just be liable for estate duty. Capital gains tax and executor fees will also have to be paid. An experienced financial planner will be able to help them structure their affairs so that these payments are minimised.
They should review the situation every year to ensure that there are no surprises.
If you are over 50 or have assets worth more than R3.5-million, then you should review your estate every year. DM168
This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.
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