Understanding the laws of estate planning - Part I

In this three-part interview series, Head of Legal Services at Discovery Life, Harry Joffe, shares what you need to know - and tell your clients - about how the law supports the process of estate planning.

What is key to understand about estate planning and the law in South Africa?

South Africa has its own set of laws in terms of inheritance, wills, and the winding-up process. Other jurisdictions, like Europe or Middle East, have separate sets of laws. For example, Europe has forced heirship laws where, no matter what your will says, a percentage of your assets are distributed in fixed percentages to your family. The Middle East has Sharia (Islamic law), so, if you're a resident there, that will override your will.

South Africa tends to follow British law. Here, we have freedom of testation - in other words, we can leave what we want to whomever we want. But it's important for clients to know there are at least three limitations to that:

1. You have to support your spouse and children. So, if you left everything to a friend and you cut out your spouse and children, they could submit a maintenance claim. That would be in terms of the Maintenance of Surviving Spouses Act in respect of the spouse, or our common law, which states that you have to maintain your dependent children.
2. You can't do anything which is unlawful or against the constitution. We've had a lot of interesting cases where clauses in people's wills cross racist and sexist lines, and these will not generally be upheld by the court. There are also instances where clauses in a will go against public policy.
   
   The courts generally won't enforce anything which is against public policy or the constitution. They'll just take a pen and cross out that portion of the will , so that those clauses no longer "exist".
   
   For example: There's quite a famous case where a mother died and left assets to her daughter, on the condition that the daughter was longer married to her husband. Now, when something like this goes to court, the court says, "Well, that clause is trying to break up a marriage." This is against public policy, so the court has the power to just ignore that clause - which they did, in this particular case. The court decided the daughter would get the assets and she didn't have to divorce her husband.
3. You need to understand exactly what being married "in community of property" really means. What this means is that if a spouse dies, the estate is shared 50-50. That means that you've only got your 50% share to deal with - you can't deal with your spouse's 50% share.

COVID-19 and lockdown regulations have resulted in several challenges affecting the process of keeping a will or an estate plan up to date, or even to start the process. What should people keep in mind in this regard?

There are a few issues around wills. There are set requirements in the Wills Act for how a will must be signed and witnessed to be valid. One of the big requirements is that it must be witnessed by two people over the age of 14 who are not heirs in the will. And the witnesses have to sign it in the client's presence. That's very important.

If this is done wrong - for instance, if the will is not signed correctly or witnessed properly - the will won't be accepted by the Master of the High Court, and your client's heirs may have to go to court to resolve the problems that arise. This can cause delays and additional costs for your clients.

Lockdown conditions have caused a few problems around signing wills because people are restricted from in-person contact to some degree.

So, as an example: A parent wants to draw up a will. They sign the will but only have their family around them. Their family members can't sign as witnesses because they're likely to be heirs in the will. The parent needs to find two independent witnesses. But this gets tricky, because in today's circumstances, we may not want contact with strangers. A way around this is to ask a neighbour - you can pass your will to them at a short distance to sign as a witness.

It's interesting to see that in other countries, like New Zealand and places in Europe, exemptions have been passed during the pandemic which allow people to do this electronically, but we don't have that. Our will requirements are still inflexible law - as they were before COVID 19 - and people need to be aware of that.

In South Africa, a will has to be a proper paper document that's signed and witnessed properly - lockdown or no lockdown. There are no exceptions to that, without court approval

What is most important to keep in mind when putting together a team of experts for an estate plan?

1. Get an expert to draft the will. For the most part, everyone does that. But the next step is, I think, where many people go wrong.
2. Choose your executor carefully. There's a temptation to make the executor a family member or a friend, so that when they estate is wound up, they don't charge the heirs. There are fixed tariffs in the Administration of Estates Act which the executor could charge -3.5% plus VAT as a maximum, which comes to just over 4%. People often want to avoid that. So, they'll make a friend of a family member an executor. But this has its risks: friends or family members don't always know how to wind up the estate. Not everyone has this kind of experience or knows what needs to be done. So, it's best to appoint a professional.

We've partnered with a trust company, ABSA Trust. They have a professional relationship with the Master of the High Court and professional staff who go there all the time, so they can ensure estates are correctly wound up. They are more familiar with the kinds of challenges that can arise and understand how to manage them - whereas a friend or family member may not, and this can cause delays.

Is it better to appoint a professional executor only or can it be beneficial to have a family member or friend as a co-executor to oversee the winding-up process?

This is something we've thought about a lot, actually, because many people do want to name someone close to them as their executor - such as a spouse. We've made allowances for this in the Discovery Estate Preserver policy. It pays the executor fees if our preferred provider - ABSA Trust - is appointed. A spouse can be appointed as the co-executor, but they won't get paid any fees like a professional executor would. I don't think that's an issue, though.

For the most part, clients just want their spouse as part of the winding-up process so they're aware of what's going on. ABSA Trust are quite happy for a spouse to be appointed as a co-executor for this reason, if that's what a client's will states, but the spouse would have to sign away a right to any fees.

How is estate duty calculated?

When we look at estate duty, we look at the gross estate, which includes all physical assets - property, investments, a share portfolio, etc. Then we look at what's called deemed assets - things like life insurance policies, which are considered to be assets in the estate. Although they're not physically in the estate, the law brings then into the estate. So, they're known as a "deemed asset".

Looking at the assets in the estate, we then calculate the gross value, and from that value work out any deductions - like taxes, executor's fees, winding-up costs, overdrafts, liabilities, funeral and final deathbed expenses. Once those are deducted, we get a net value.

From that net value, there are two other major deductions:

• The first is what we call the Section 4q deduction - no estate duty has to be paid on anything that's bequeathed (left) to a surviving spouse. It's only when the spouse dies that estate duty would have to be paid.
• The other exemption is what every estate gets - what we call the general abatement. Every estate is entitled to R3.5 million as an abatement. This means you only start paying estate duty if the estate is worth more than R3.5 million. [or R7m if you are the second dying spouse and the first dying spouse did not use their R3.5m]

In Understanding the law around estate planning - Part II, Harry shares a few key considerations for families, especially those about to get married or who have minor children.

Speak to your client's about holistic estate planning today