Real Estate and Building up an Estate – why is it important?
The purchase of a house, is one of the biggest decisions, if not the biggest that people can make early in their careers to acquire assets and build up an estate.
It is therefore of utmost importance that one then also deals with proper estate and financial planning on how to deal with your assets during your lifetime, as well as in the event of your death.
It is important that a person realizes at a young age, that the moment when you receive your first payment or salary, that this is in the most instances the date where you can potentially start building up your own assets in your estate. Remember, not all of us are lucky enough to inherit a lot of assets, either making it easier for some, or cultivating an easy come, easy go strategy with others.
Whatever the case might be, one always has the choice and discretion to determine your own financial destiny. Why would one want to waiver that privilege, by not exercising your own right to make decisions on your hard earned possessions? This is the reason why a will always forms part of estate planning.
This leaves us with a number of technical questions on estate planning to briefly explain.
What is an Estate?
In a nutshell an estate is the sum total of all assets in different asset classes, including property, that a person acquires over a lifetime. Depending on personal circumstances, some individuals have a very meager estate, whereas others have built up very wealthy estates. No matter how small or how big your estate is, it will always take some planning and the basic principles will prevail.
An estate comprises of the net value of an individual, whether alive or dead. The net value means that there can be assets, accumulated over the lifetime of the individual, as well as liabilities in the estate. These assets then need to be distributed at the individual’s death, after settling debts, claims and costs.
A variety of factors play a role in the building up and planning of an estate.
What is Estate Planning – and why is it important?
Estate planning is firstly the process of designing an effective plan to build up assets and then manage the assets in such a way that the assets are not only growing, but are also protected and preserved in life to enjoy the fruits of one’s work and initiative.
Estate planning secondly also then includes the distribution of the wealth that has been built up, to one’s heirs or beneficiaries in the event of death.
Thirdly it is important that one needs to plan effectively to ensure that there are enough liquid assets or money to settle all possible debts, costs and expenses in the estate. It is also of utmost importance to make provision for one’s family and/or dependents to allow them to enjoy the same standard of living as prior to the individual’s death and to make provision for all their future needs up to a certain time or age.
Proper estate planning thus ensures that an individual enjoys his wealth in life and that the enjoyment of the wealth is continued for his next of kin after his death.
It is important to understand that the implication of the shortfall of liquidity in an estate can have the consequence that the estate cannot be administered and executed. It potentially puts the executor in the unfavorable position to interfere with the inheritance, which means that it can have a negative influence on the inheritance and the lifestyle of the individual’s heirs and loved ones. It can physically mean that some or all assets need to be sold to the highest bidder in potentially unfavorable market circumstances. The family can be obliged to move to cheaper accommodation and the shortage of cash can potentially put the family in a very unfortunate position with a lack of provision for daily living and actually leave them destitute.
The crux of the matter is that in life, an individual has the opportunity to effectively do proper and responsible estate planning, to make provision for capital and income needs and to find methods of reducing the costs that are required with respect to an estate.
What factors can play a role in estate planning? … in a nutshell:
People normally have a free choice to do with their assets as they wish. From a legal point of view a person needs to have contractual capacity to donate, sell or cede assets. Depending on age, marital status and mental health, a person can have no contractual capacity, limited contractual capacity or full contractual capacity.
The Matrimonial Property Act, the Marriage Act, the Customary Marriage act and the Civil Union Act plays a role on contractual capacity and also on the right to bequeath or alienate assets. Furthermore the marital regime plays a crucial role on the financial planning of bequests.
A donation is the free transfer of ownership of property to a recipient, without a written agreement. Normally donations attract a 20% donation’s tax. A donation, if structured correctly can be a valuable tool in estate planning to diminish estate costs.
There are two types of bequests, namely absolute bequests and also bequests of limited rights. No matter what type of bequest we are dealing with, it will have an implication on ownership, as well as the costs in the estate.
When a person dies, his possessions must be transferred to another person. The responsible way to dispose of possessions at death is by means of having a valid will. If a person does not have a valid will, his possessions will be transferred according to the fixed rules of the Intestate Succession Act. The person thus loses his free will of the distribution of his assets at his death to heirs and beneficiaries of choice.
A will is a legal document, recording the free and independent wishes of the testator to distribute the assets in his estate at his death. There is a vast number of technical factors to take into consideration when drawing up the will, with respect to legal capacity of all parties and rules of signing, appointing guardians, the execution of the will and a lot more
A cession is when one person transfers his ownership and rights in terms of a policy to another person or an institution, eg a bank. There are two types of sessions, namely outright sessions and collateral sessions. The person granting the session is called the cedent and the receiver of the session is called the cessionary.
There are basically two types of trusts that we work with, namely a testamentary trust, or a trust mortis causa, which is created at the death of the founder by means of a will with the aim to manage assets in a responsible way for the beneficiaries for a variety of reasons.
Then we also get an Inter Vivos trust, which is created during the lifetime of the founder. This type of trust is mainly used as an estate planning tool.
Capital Gains Tax:
Capital Gains Tax (CGT) applies to all disposal of capital assets after the effective date of 1 October 2001 when CGT was introduced as part of the Income Tax Act. If an asset of capital nature is disposed of at a profit, the profit or gain is subject to CGT. When an asset is sold at a loss, the loss can be set off against other capital loss, or carried over to the next tax year, but always subject to certain conditions as set out in the Eighth Schedule of the Income Tax Act.
It is important to take the rules of disposal and deemed disposal into consideration when doing estate planning. It is also important to understand the conditions of calculation of CGT and to take note of valuations, exclusions, rebates and the rollover relief, especially when disposing of real estate.
It is important to understand the calculation on which estate duty is based and know which exclusions and deductions will be allowed against the estate costs, as well as the rules of the current abatement of
R3 500 000 and also roll-over to a spouse.
The executor has the role to administer the estate, pay all the debts, estate duty and will also distribute the assets in the estate according to the will of the deceased. Executor’s fees are normally calculated at 3,5% (3,99% VAT incl) of the gross estate handled by the executor. The executor can also charge 6% on income accrued and collected after death. If the deceased was married in community of property, the executor’s fee is charged on the total joint estate.
In closing ….
When we take a look at the very brief summary on estate planning above, it becomes clear that we as everyday people find it a mammoth and time consuming task to do all the research involved in all the intricate legal and technical detail and then running the risk of still not getting it right.
The task is best left to those who are trained to assist as real estate, legal and financial experts.
Never be penny wise and pound foolish …… contact your experts today.
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Author: Erna Rossouw
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