Monthly Archives: June 2017

The right choices after the death of a spouse

In this advice column Mikayla Collins from NFB Private Wealth answers a question from a reader who needs advice for a widowed relative.

Q: Someone in our family is 60 years old, has never worked but has a tax number and is a recent widow. She currently has no means of receiving an income other than the option of renting out her immediate residence as a way of earning a little income every month to take care of expenses.

 The house is fully paid for and therefore she won’t have to worry about a bond. With her monthly expenses in mind, the rental from her unit will be enough to look after rates and levies as well as 90{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} of her monthly expense which is very positive.

Our question is simply, with a sizeable spousal inheritance of around R8 million, what would your advice be to someone in that specific situation?

We believe that she would require to use some of it – possibly dividends or withdrawals over time – to assist her with maintenance to her house or to supplement her lifestyle in some way, shape or form.

We’re not naive to know that having a rental income would provide her the ability to never need to touch her capital investment, but should she need to, what would the correct investment be and are there any penalties involved in investing that amount of money? And what are they?

We do not know what would be the best route to take and would really appreciate your time and expertise.

It seems as if it has already been decided that your relative will rent out her residence for income. I assume that you have taken alternative living arrangements into account in your calculation of expenses and there will be a shortfall of around 10{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} of her monthly expenses thereafter, which must be provided for in deciding on an investment strategy.

So what we are left with is R8 million inheritance to invest, with the objectives of providing a small income and allowing for ad hoc withdrawals should the need arise.

Firstly, you need to determine the rand amount of monthly income that she will require, and the portion of the R8 million capital that will be needed to provide this income, remembering to take inflation into account. This portion can be invested to provide dividends and interest, and the decision of the underlying investment would depend on her risk preferences and need for capital protection.

If she wants complete capital protection, then she could use an interest bearing bank account such as a 32 day notice or fixed deposit, where she would get in the region of 7{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} per annum at current rates. But bear in mind this would not allow for inflationary increases. If she wanted some dividend income then she could look at a share portfolio, or she could consider income focused and cautious unit trust funds as a mix of both dividends and interest.

If she invested through a voluntary structure such as a unit trust investment or share portfolio, 15{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} withholding tax would be applied to dividends, and any interest above R23 800 per annum would be taxed as income. Capital gains tax would apply to any units or shares sold if applicable.

If she invests through a living annuity structure, local dividend tax and tax on interest will not be applied, and capital gains will not be taxed, but all income withdrawn will be taxed at her marginal rate of tax.

Deciding which investment is best for her needs will therefore depend on the rand amount of income required. The most tax efficient structure will differ depending on the amount she needs.

Consider when investing your savings in retirement

In this advice column Mikayla Collins from NFB Private Wealth answers a question from a reader who needs advice on investing in retirement.

Q: I am retiring within the next 3 months and would like to ask advice in my situation. I am 70 years old and have R900 000 to invest. It is currently in a money market fund earning interest of approximately 7.25{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327}.

I have no dependants, my townhouse is paid for, my car is paid for and I have no debt. I just have my monthly expenses which are rates, electricity, levy and living expenses.

As I am retiring soon, I need to invest this amount, probably split into two different portfolios – one to generate an income and one to grow the capital over the long term. I don’t want to submit to a ‘pension’ fund as such as that would also attract charges each month which I cannot afford. I want to invest most of this lump sum myself as I cannot afford to attract any extra fees each month being paid to an investment adviser.

I would welcome your reply as to your suggestions and identifying a few funds which would give me what I am looking for or any alternative suggestions.

Also, at my age what taxes would I be liable for when investing in a fund to draw from?

From your question it is clear that you are aware of the need to grow your capital as well as provide income. Most people aim only to maximize their income, forgetting about the long term effects of inflation, and the fact that some growth is needed over and above the income they are taking. People who do not take note of this, end up drawing down on their capital and running out of money later on.

As far as income is concerned, you should be looking at income funds, which invest only in cash, government and corporate bonds and listed property. They allow you to have access to the returns provided by government and corporate bonds, but still have access to your money should you need it.

Income is the primary focus, so these funds will not invest in equity and the income you receive should be quite stable. The top ten income funds have produced between 8{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} and 10{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} in a very low interest rate environment, where banks would have given you around 5{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} to 7{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327}.

Choosing funds for growth is more likely to be where you may struggle and if you don’t want to pay adviser fees you are going to have to do a lot of research yourself. We cannot under any circumstances recommend funds to you without knowing your specific needs and constraints and your willingness and ability to accept risk and volatility.

This is not only in terms of local regulations, but also international ethical and professional standards. The question you ask may seem simple but even in trying to put together a few simple tips, there is a lot more to it than just recommending a few funds.

However, here are some basic guidelines:

Stick to the asset managers you know. They are well known for a reason and usually it is because they are consistent in performance. If you refer to their websites, the information is quite easy to find. Get a few fact sheets for the funds you are interested in and compare them to each other.

Start by comparing the returns – not just over one year but three, five and ten years. If you are presented with two funds with similar returns, you should then choose the one with the lower risk or volatility.

How is estate duty calculated

In this advice column Geraldine MacPherson from Liberty answers a question from a reader who has questions around structuring his estate.

Q: I have some questions regarding estate planning . What I need to know is whether there is enough cash in my and wife’s estate to pay the estate duty and executors fees.

In order for me to make adequate provision for the costs associated with dealing with our affairs, I would like to get an estimate of the estate duty and executor’s fees.  

My questions are as follows. When determining the value of the estate on which the estate duty and executor’s fees are based:

 

  • Are assets such as property and motor vehicles valued at purchase price or at market value? If the latter, who determines the market value and on what basis?

The value of the assets is based on their market value, which the executor is tasked with determining. When it comes to assets such as immovable property, an appraiser appointed in terms of the Administration of Deceased Estates Act will have to be used and the estate will have to pay this person’s fees.

Practically, the car’s value will be the book value, unless it is sold, in which case it will be the actual sale price. Note that the Master can insist on an appraiser valuing any property (not only immovable property) if he has reason to believe that the value provided by the executor is not reasonable.

  • Are life insurance policies included in the assets as deemed property a) for the purposes of calculating executor’s fees; and b) for the purposes of calculating estate duty? 

If a beneficiary has been nominated then the policy benefits will pay directly to the beneficiary and will not fall into the estate. The executor will therefore not be eligible to charge his fee on the amount and it will only not attract estate duty if one of the spouses is the beneficiary or if it is a qualifying keyman or buy and sell policy.

If, however, no beneficiary is nominated or the estate is nominated as the beneficiary, then the benefits will fall into the estate, under the administration of the executor and he will charge his fee accordingly.

In such a case, the benefits will also be taken into account when calculating estate duty, unless the life insurance policy is exempt in terms of the provisions of the Estate Duty Act, or accrues to the surviving spouse. Interestingly, it is the person who receives the benefits who will have to actually pay the estate duty attributed to the policy benefits.

The types of policies that are exempt are certain employer owned policies, such as certain keyman policies, certain buy and sell policies, and policies that have been taken out to meet a requirement in an ante nuptial contract. In addition, any benefits, including death benefits from long term insurance policies that accrue to a surviving spouse, qualify as a deduction when it comes to estate duty under section 4(q) of the Act, thus no estate will be attributed to those policies. 

  • I have a retirement income fund (living annuity). Is this included in the assets of the estate for the purposes of a) calculating the executor’s fees; and b) for the purposes of calculating estate duty? If so, what value is given to this retirement funding given that it is pre-tax money?

If you have nominated a beneficiary for the annuity, then the benefit will pay directly to that beneficiary and it will not be included in the estate. The executor will therefore not be eligible for a fee on it. If no beneficiary is nominated, then the benefit will be paid to the deceased’s estate, as a lump sum.

This lump sum will attract retirement tax in the deceased’s hands, and the after tax benefit will be paid to the estate. The executor will then deal with this asset and will accordingly charge his fee.

In terms of current legislation, the benefits in an approved retirement fund or compulsory annuity are exempt from estate duty. This may change to some extent going forward, as National Treasury intends to include any “disallowed contributions” for estate duty purposes. We only have draft legislation on this at this point in time, so we do not know for certain how this will actually play out.

Reduce the costs in an estate

The death of a spouse, friend or relative is often an emotional time even before estate matters are addressed.

And truth be told, death can be an expensive and cumbersome affair, particularly if estate planning was neglected, the claims against the estate start accumulating and there isn’t sufficient cash to settle outstanding debts.

People generally underestimate the costs related to death, says Ronel Williams, chairperson of the Fiduciary Institute of Southern African (Fisa). Most individuals have a fairly good grasp of significant expenses like a mortgage bond that would have to be settled, but the smaller fees can also add up.

To avoid a situation where valuable assets have to be sold to settle outstanding debts, it is important to do proper planning and take out life and/or bond insurance to ensure sufficient cash is available, she notes.

Costs

The costs involved in an estate can broadly be classified as administration costs and claims against the estate. The administration costs are incurred after death as a result of the death. Claims against the estate are those the deceased was liable for at the time of death, the notable exception being tax, Williams explains.

Administration costs as well as most claims against the estate will generally need to be paid in cash, although there are exceptions, for example the bond on the property. If the bank that holds the bond is satisfied and the heir to the property agrees to it, the bank may replace the heir as the new debtor.

Williams says quite often estates are solvent, but there is insufficient cash to settle administration costs and claims against the estate. In the event of a cash shortfall the executor will approach the heirs to the balance of the estate to see if they would be willing to pay the required cash into the estate to avoid the sale of assets.

If the heirs are not willing to do this, the executor may have no choice but to sell estate assets to raise the necessary cash.

“This is far from ideal as the executor may be forced to sell a valuable asset to generate a small amount of cash.”

If there is a bond on the property and not sufficient cash in the estate, it is not a good idea to leave the property to someone specific as the costs of the estate would have to be settled from the residue. Where a particular item is bequeathed to a beneficiary, the person would normally receive it free from any liabilities. This could result in a situation where the beneficiaries of the residue of the estate may be asked to pay cash into the estate even though they wouldn’t receive any benefit from the property, Williams says.

The most significant administration costs are generally the executor’s and conveyancing fees.

If the will does not explicitly specify the executor’s remuneration, it will be calculated according to a prescribed tariff, currently 3.5{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} of the gross value of the assets subject to a minimum remuneration of R350. The executor is also entitled to a fee on all income earned after the date of death, currently 6{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327}. If the executor is a VAT vendor, another 14{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} must be added.

Assuming an estate value of R2 million comprising of a fixed property of R1 million, shares, furniture, vehicles and cash, the executor’s fee at a tariff of 3.5{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} would amount to R70 000 (plus VAT if the executor is a VAT vendor). Conveyancing fees will be an estimated R18 000 plus VAT. Depending on the situation, funeral costs may be another R20 000, while other fees (Master’s Office fees, advertising costs, mortgage bond cancellation and tax fees) can easily add another R10 000. By law advertisements have to be placed in a local newspaper and the Government Gazette, with estimated costs of between R400 and R700 and R40 respectively. Master’s fees are payable to the South African Revenue Service (Sars) in all estates where an executor is appointed with a gross value of R15 000 or more. The maximum fee is R600.

Where applicable mortgage bond cancellation costs, appraisement costs, costs of realisation of assets, transfer costs of fixed property or shares, bank charges, maintenance of assets and tax fees will also have to be paid. The executor is also allowed to claim an amount for postage and sundry costs, while funeral expenses, short-term insurance, maintenance of assets and the cost of a duplicate motor vehicle registration certificate may also have to be taken into account.

Emotions that could derail your will and estate plan

People often draft a will with the best intentions, and even though the document may be technically sound, emotional decisions can have far-reaching consequences for the beneficiaries. They may even result in potential delays when winding up the estate.

To discuss the feelings or sentiments that could derail your estate planning, I’m joined by the CEO of the Fiduciary Institute of Southern Africa, Louis van Vuren. Louis, I’d like to discuss each of these emotions in some detail, but let’s unpack the issues first. What has been your experience? What are the five emotional issues that may create problems when winding up an estate?

LOUIS VAN VUREN: Ingé, firstly the desire to control – even after your death. Then also the desire to keep the peace – specifically in difficult family circumstances. Then there is also sympathy with struggling children, trying to look after your struggling children after your death, sometimes at the expense of other considerations. Feelings of guilt, or what I sometimes call debts of honour, when people feel they want to set the record straight or set things right in the will that they haven’t got round to during their lifetime. And then lastly feelings of superiority, whether it’s moral superiority or racial superiority or whatever. That also sometimes comes between a good, practical legally enforceable will and the wishes of the testator.

INGÉ LAMPRECHT: Louis, like you mentioned just now, impractical provisions in a will are often due to a desire to control or rule from the grave, so to speak. Why is this problematic and how do you avoid it?

LOUIS VAN VUREN: Ingé, the reality is that it doesn’t matter how carefully you think about things prior to your death, after your death circumstances can change drastically. And then if your will and the provisions of your will and how you would like things to happen after your death – sometimes for many years to come in certain cases – do not take into consideration the fact that circumstances can change drastically, this can lead to impractical situations, impractical solutions, etc.

One example would be: it has been, especially in the farming community, for many years customary to leave the farm and the farming operations to, let’s say, a son with the usufruct in favour of the surviving spouse, usually the wife. And the usufruct – in itself there is nothing wrong with it and it’s a perfectly legal structure – but the practical side of this is that often the farmers also try to limit the usufruct by stipulating that it will exist until the death or remarriage of the surviving spouse. And when people started living together and not necessarily getting married, there were all kinds of hilarious ways of trying to avoid a situation where the surviving spouse would still enjoy the usufruct after living with somebody.

An example that I came across many years ago was where the will stipulated that if the surviving spouse, the wife, stayed with any man under the roof of that farmhouse for more than five nights, the usufruct would be cancelled and everything would then go to the son. Now obviously the surviving spouse then found a very creative way around that. She married a year-long friend of theirs and they stayed in the house on the farm from Monday to Saturday morning, then went to town for the weekend and came back on the next Monday morning.

INGÉ LAMPRECHT: Very clever!

LOUIS VAN VUREN: Not breaking the conditions of the will. That’s just a hilarious example of where trying to rule from the grave didn’t work.

Then the other thing: there are conditions without sanction or an alternative bequest if the condition is not met. Now, that means nothing if you do not attach a sanction to a conditional bequest. An example of a conditional bequest would be: “I bequeath R1 million to my son, but he can only get it if he runs the Comrades Marathon in under six hours.” If you don’t set an alternative in the will, that means nothing because the condition is then unenforceable.

INGÉ LAMPRECHT: Louis, a lot of South African families are so-called “reconstituted” families. If this is your second or third marriage, there may be competing interests at play and a desire to keep the peace. What do you see in practice?

LOUIS VAN VUREN: Ingé, a reconstituted family can be a very simple situation, but it can also be a very complex situation. You can just think of all the different permutations with regard to children. In these families you get my children, your children, our children – and those are all competing interests. The current spouse may not be the natural parent of any of the children. Then you have the competing interests in the estate plan and, in crafting a practical and legally binding will, the challenge of addressing competing interests of looking after the surviving spouse, but at the same time protecting the interests of the children.

There is a slightly obscure provision in the Wills Act of 1953, which basically provides that if you bequeath something to the surviving spouse and a descendant or descendants – your children, for example – and let’s say one of the children renounces that inheritance, then that portion that would have gone to the child who renounced the inheritance will go to the surviving spouse. There is no way you can avoid it. You cannot write that legislative provision out of your will. It overrules any provision in your will. So that is not necessarily a problem if the children are all the children of the surviving spouse, the natural children of the surviving spouse.

But if the surviving spouse is not that natural parent of any of the children, that could become a problem. The conflict has to be managed – that conflict and those competing interests have to be managed in crafting the estate plan and drafting the will, making sure that you balance the interests of the surviving spouse and the children in a situation like that. If you don’t manage it at the planning and drafting stage, it will become messy after your death.