Pitfalls in estate planning 2013

Welcome

PITFALLS IN ESTATE PLANNING

Estate planning can be defined as:“The arrangement, management and

disposition of a person’s estate so that he, his family and other beneficiaries may enjoy and continue to enjoy the maximum from his estate and his assets during his lifetime and after his death, no matter when death may occur”. Meyerowitz

Objects of Estate Planning1. Commercial soundness: The simplest,

most cost efficient estate plan should be implemented to achieve the desired results. Keep it simple!

2. Liquidity: The estate plan must identify and provide for the income requirements of the planner and his dependants. No use in wealth being inaccessible!

Objects of Estate Planning3. Good governance: Knowledge of where

the Will is kept, proper trust administration, accurate records of investments etc.

4. Flexibility: The estate plan must be capable of adapting to changing circumstances. Both from an internal and external perspective.

WILLS:

A LEGACY OR A LIABILITY?

Why should a Will be drafted professionally?

A Will is the single most important tool of any estate plan, economic, fiscal or dynastic. Badly drafted, it can destroy families and damage fortunes.

Once the Will comes into operation it is often too late to make any changes!

Why is a Will important?

• With no valid Will you will die intestate.

• Dying intestate will lead to unintended consequences with regards to– Assets not benefiting the intended people,– Unintended death duties,– Unintended Capital Tax, and– Loss of ability to appointment an executor/s of

choice.

Example of dying intestateMr Jones passes away without leaving a valid Will. He leaves behind his wife Mary, his son Paul who is 18 and his two minor children. His estate after all liabilities and administration costs is valued at R10 million. He was married out of community of property excluding accrual.The distribution of his estate including death duties will look as follows:

Example of dying intestate cont..• R10 Million is divided by 4, with a spouse

entitled to a Child’s share or R125,000, which ever is the greater

• Estate Duty would be as follows:Total estate value R10,000,000

Less: S 4q R2,500,000

Less: abatement S 4A R3 500 000

Total Estate Duty R4m x 20% = R800k

Dying intestate cont..Mr Jones

MaryR2,3m

PaulR2,3m

Minor 1R2,3m

Minor 2R2,3m

Guardians Fund

Guardians Fund

Government run

Total estate duty cost = R800k

Requirements of a valid Will

• Must be signed in the presence of two witnesses (older than 14).

• Must be dated.• Each page must be signed by the testator/trix.• Must be signed in the presence of two witnesses

who do not benefit from the Will and they, in turn, must sign in the presence of the testator/trix and each other.

When should your Will be reviewed?

• At least every two years.• If you have children/grandchildren.• If you have offshore assets.• If you get re-married/divorced.• On the death of a spouse.• If there are amendments to the tax act.• If you have implemented any other form

of estate planning such as a trust.

Conclusion on Wills1. Make sure that you have a Will!

2. Make sure that you know where the Will is kept!

3. Make sure that the Will has been correctly signed, witnessed and dated!

4. If you have a foreign Will make sure that the offshore and local Wills do not override each other!

Conclusion on Wills5. Be aware that your marital contract will

determine the extent of the assets that you may bequeath!

6. Ensure that the Will is synchronised with the beneficiaries of any life cover!

7. Be aware that the Will does not deal with the benefits of RA’s, Pension Funds etc!

TRUSTS

Benefits of a Trust

• Ensures the smooth handover of assets from one generation to the next.

• Cares for assets for those who are unable to look after the assets themselves.

• Preservation of wealth– Example: a farm or holiday house passed

from one generation to the next – savings in Estate Duty Tax and Capital Gains Tax.

Benefits of a Trust• Reduction of death duties which are made

up of :-– Deemed Capital Gains Tax – max 13.3%.– Executor fees – max 3.99%.– Estate duty tax – 20% .

• Ability to split income and capital gains to multiple beneficiaries.

• Protection of assets from creditors.

BADLY DRAFTED TRUST DEEDS

Background1. The Deed of Trust is the trustees’ constitution and if

a responsibility, duty or power is not expressly stated then it cannot be implied by the trustees. The trustees have no authority to ‘assume’ that they may carry out a particular duty or power and if they do so then they are acting ultra vires.

2. It is a dynamic document that must be reviewed regularly. Tax and trust laws change.

3. Experience has shown that at least 9 out of 10 trusts either have wrong clauses or are missing clauses.

Main reasons for bad clauses in trust deeds in RSA :-

– Bad drafting,– Ignorance of unique trust law system

in the RSA,– Using precedents foreign to RSA

trust law.

• Bad drafting– Trust templates are often plagiarised by

different companies,– This plagiarism was recently referred to in

Potgieter v Potgieter (629/2010) [2011] ZASCA 181 (30 September 2011) where the attorney who prepared the deed stated in Court;

“It unintentionally found its way into the draft, because I slavishly copied a precedent without realising that the statement was inapposite to the deed that I prepared.”

• Same template is never updated to changes in trust case law or tax law.

• Same template is not customised to meet the individual requirements of the client.

• There are numerous examples of incorrect clauses – too many to discuss during this presentation.

Summary of problem Trust Deed clauses

1. Key terms used throughout the trust deed are not adequately defined or are incorrectly worded.

2. Incorrect Beneficiaries. 3. Mistakes dealing with the power and authority of trustees.4. Insufficient clarity when dealing with administrative

matters.5. Manner in which income and capital is allocated.6. Termination date of trust. Pre-emptorary clauses.7. Control clauses granted to one trustee.

Improper management of trust

1. Requirements as laid down in the Trust Deed are not complied with by the Trustees.

2. All the Trustees are not fulfilling their fiduciary responsibilities.1. Ensuring property is adequately insured.2. Determining the correct risk profile.3. Determining the asset allocation to match the income

requirements of the Beneficiaries.

3. Trust income is paid directly to a Trustee / Beneficiary and not into the Trust bank account.

Improper management of trust

1. Trustee meetings are not held.2. Trustee /s never attend meetings.3. Trust transactions are not recorded through

minutes or resolutions.4. Annual Financial Statements are not prepared.5. Trust income / capital gains are not treated in the

most efficient manner.6. Testator / testatrix Wills are not synchronized with

the trust.

ADMINISTRATION

OF

DECEASED ESTATES

PROBLEMS EXPERIENCED IN ESTATES

• Natural or unnatural death. – Post mortem / police inquest / toxicology reports for unnatural

deaths.

• Last Will and testament. – Badly drafted / original missing / legal requirements not met.

• Uncooperative family members or heirs.

• Untraceable assets.

• Disputed claims.

• Insolvent estate.

• Liquidity issues.

PROBLEMS EXPERIENCED IN ESTATES

• Fixed property:

– Rates clearance certificates (billing issues),

– Problems with the deeds office,

– Sale of property,

• Heirs consent,

• Masters endorsement.

• Tax:

– Outstanding personal tax,

– Uncooperative tax consultants,

PROBLEMS EXPERIENCED IN ESTATES

– Issuing of tax certificates by institutions,

– Trustees of Pension / Provident funds.

– SARS processes.

• Juristic entities:

• Valuations for company’s and cc’s.

• Lost listed share certificates.

• Financial institutions processes.

• Firearms.

• Motor vehicles:

- Lost registration documents.

PROBLEMS EXPERIENCED IN ESTATES

• Master:

– Lost files,

– Lack of intellectual capacity,

– Uncooperative staff,

– Estate duty assessments,

– Issuing amended Letter’s of Authority for existing and new trusts.

• Accrual claims.

QUESTIONS?