Wealth transfer made easy: top estate planning strategies

Effective estate planning means fully utilising the available mechanisms to structure your affairs and transfer wealth seamlessly to your loved ones. Like a cog in a well-oiled machine, each element must work in harmony to achieve your specific succession objectives. Here we unpack several strategic tools to maximise wealth transfer.

Living annuities: Living annuities, where beneficiaries are nominated, offer an efficient mechanism for wealth transfer. This is because funds within a living annuity do not form part of your deceased estate, ensuring swift distribution to beneficiaries. Unlike pre-retirement funding vehicles, living annuities allow investors to nominate beneficiaries directly. Upon the annuitant’s death, these assets bypass the estate, avoiding estate duty (assuming the funds qualified for a tax deduction), and no executor’s fees are applicable.

However, failing to nominate beneficiaries results in proceeds being paid into the deceased's estate. Although estate duty remains inapplicable, executor fees may be charged. Beneficiaries can withdraw the funds fully or partially, subject to retirement fund tax rates, or opt to retain the annuity, adjusting draw-down rates and investment portfolios according to their requirements.

Life insurance policies: Life insurance policies effectively create liquidity and financial protection for loved ones upon death. Structuring these policies correctly is vital, as their proceeds are considered 'deemed property' and form part of the deceased estate for estate duty calculations. An important exception applies to correctly structured domestic key person and business assurance policies, which are exempt from estate duty.

When determining the appropriate life cover amount, consider debt settlement, estate duty liabilities, taxes, and dependants' financial needs, keeping in mind that insufficient liquidity could force executors to sell assets intended for heirs, diminishing the value of your legacy.

Trusts: Trusts are powerful estate planning tools, safeguarding assets, providing creditor protection, and optimising tax efficiency. However, correct establishment and structuring are crucial for effectiveness and validity. Testamentary trusts, created in terms of your will, remain the most widely used trust mechanism in South Africa, particularly for protecting inheritances for surviving spouses, minors, or dependants with special needs.

Inter vivos trusts (set up during your lifetime) typically hold growth assets like property and shares, effectively shifting asset appreciation out of your personal estate, thus reducing estate duty. That said, tax and estate duty savings mustn't be the primary motivation for establishing an inter vivos trust, and the estate planner must clearly understand their long-term intentions, ensuring assets moved into trusts are meant for long-term holding.

Bequests: Bequests, made explicitly through your will, provide certainty that specific assets pass directly to nominated individuals (legatees) upon your death. Clarity in identifying beneficiaries and assets is critical to avoid ambiguity. Importantly, assets in a deceased estate are distributed in a predetermined sequence: debts are settled first, followed by special bequests, with any remaining assets (residue) subsequently distributed to residual heirs. Therefore, when making special bequests, ensure adequate liquidity in the estate to meet these obligations without forcing the executor to sell assets meant for other heirs.

Donations: Donations made during your lifetime can strategically reduce your estate duty liability, though they require careful planning due to potential donations tax implications. Donations exceeding annual exemptions attract donations tax at 20% for amounts below R30 million and 25% thereafter.

However, there are exemptions, including donations between spouses, contributions to the government, registered political parties, and approved public benefit organisations. Additionally, each taxpayer may donate up to R100,000 annually tax-free. Employing donations strategically during your lifetime reduces estate value and mitigates estate duty exposure, transferring wealth efficiently to intended beneficiaries.

A central theme across these mechanisms is the critical role liquidity plays in ensuring efficient wealth transfer. Lack of liquidity in your deceased estate can compel the executor to sell valuable assets to meet liabilities or honour bequests, thereby undermining your estate planning goals. Therefore, proactively addressing liquidity through life insurance policies, strategic asset placements, and thoughtful donations is essential.

Estate planning is not a once-off task but an ongoing process requiring regular reviews and professional guidance. Changes in legislation, tax environments, personal circumstances, or family dynamics necessitate continuous adjustments to your estate plan. By carefully integrating these strategic mechanisms into your estate plan and ensuring adequate liquidity, you can confidently navigate complexities, minimise tax liabilities, and secure a meaningful financial legacy for your loved ones.

* Tapfuma is a Certified Financial Planner professional at Crue Invest.

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