Death. The taboo topic, the one most of us avoid yet it is the one absolute certainty in all of our lives yet we carry on as if we are immortal!
Most people spend an inordinate amount of time pouring over their investment strategies and plans yet they do not give any thought to what the ramifications will be for their investments on the event of their death.
In this article we will highlight the radically different outcomes for two families as a result of poor planning versus simple planning.
We have Mr. Crowd who is happy go lucky versus Mr. Sharp who has taken time to implement some basic structures.
Mr. Crowd has been successful and has amassed an investment portfolio of R10 million.
Similarly Mr. Sharp has also been successful and amassed an investment portfolio of R10 million BUT he does not own the investment portfolio as same is held in correctly structured tax compliant structures.
Our story starts with the decision by either of the individuals to structure their affairs or not.
Mr. Crowd has decided to do the easy thing, which is to do nothing, no Last Will and Testament and no structures.
Mr. Sharp takes the time and effort and establishes tax compliant personal and business structures and settles a Last Will and Testament that will dovetail with the structures.
WHAM, the fateful day. Mr. Crowd and Mr. Sharp’s vehicles collide killing them both instantly.
What happens to their respective investment portfolios?
We will firstly examine how matters will unfold for Mr. Crowd’s estate.
1. The estate is frozen, creating hardship for his dependants as they cannot access the investment portfolio. They may get something once the estate has been wound up but until then the begging bowl is out.
2. The time frame to wind up a deceased estate is between 6 months and a few years depending on various factors.
3. An executor will need to be appointed by the Master due to Mr. Crowd not having executed a Last Will and Testament. This may be a person or institution that Mr. Crowd may not have chosen for the job.
4. The Executor must liquidate the investment portfolio. Due to the timing the investments may have to be realized in a bear or declining market or other economic factors that result in investments not being sold for the optimum value.
5. Now the taxes, duties and costs kick in…
6. We will assume Mr. Crowd initially invested R 2 million and the portfolio is R 10 million at the times of his death. This will result in a gain and there will be capital gains tax payable. Unfortunately the calculation is done on the value of the portfolio as at the date of the death of Mr. Crowd and not what the portfolio is actually realized for. This can result in tax being paid on values that do not correlate. E.g the portfolio is worth R10 million on the date of death but is sold in a tumultuous market for R 7 million. The capital gain is calculated on the R10 million and not the R 7 million! The tax in this example will be 18% of R 8 million. (we have excluded the exemptions as we are only dealing with one aspect of the estate). Cost = R 1 440 000.00
7. The Executor then gets his slice of the pie and is entitled to 6% of any interest or dividends that the portfolio generates. To add insult to injury the Executor gets 3.5% plus VAT (if applicable 4.025%) of the GROSS value of the portfolio. Cost = R 350 000.00 plus VAT. R 402 500.00
8. There may be costs associated with the liquidation of the portfolio.
9. Lastly there will be an estate duty levied at 20% on the net value of the portfolio. R 7 million (realized amount of the portfolio) less the capital gains tax and the Executor’s fees is R 5 157 500.00. Cost = R 1 031 400.00.
10. The net available to Mr. Crowd’s beneficiaries is R 4,126 000.00 a whopping loss of 58.74% of the value of the investment at the date of Mr. Crowd’s death!!
Now we examine the position on Mr. Sharp’s death:
1. On his demise estate freezing does not feature due to the fact that the structures will survive his death. The structures can then flow benefits to any specified person.
2. As the structure does not fall within the domain of the estate the Executor will have no role or control of the assets. Accordingly there will be no fees.
3. The structure is not financially affected by the death and accordingly the portfolio does not have to be liquidated thus avoiding any capital gains tax.
4. Estate duty is also eliminated as the structure does not form part of the deceased estate.
5. The portfolio can be preserved in the structure and there is no necessity to sell the portfolio in turbulent market or economic conditions.
6. The costs, duties and taxes are completely avoided due to the formation of the structures.
7. We have not factored in the initial investment of R 2 million as this may have been paid back alternatively here are means of avoiding taxes and duties on the initial investment to negate same.
In closing some basic planning can result in massive savings, securing and or preserving the portfolio.
Take action, think…don’t only consider the return on your investments. Plan to avoid the destruction of the investments on the event of your death.
So are you Mr. Crowd or do you want to be Mr. Sharp…