Estate planning as part of your financial planning.

Estate planning is one of the most important aspects of any financial planning. But any time you talk about estate planning, the first thing that comes to many people's minds is a will. Wills are important. However, making a will is only one component of estate planning. It is necessary to make sure that you have sufficient assets within your estate to settle all your liabilities without having to compromise the quality of life of your nearest and dearest. Your “Estate” is defined as the inventory of everything that you own and everything that you owe. Estate planning is therefore concerned with how your assets are distributed once you pass away and after paying all your outstanding liabilities at the time. The more vast and complex your estate is the more the need to get a professional to put your plan in order. There are few main phases of estate planning.

Phases of Estate Planning

Step one is to determine just what you own in terms of assets and liabilities. If you have a large estate, you might need the assistance of an estate planning professional to document all your property. Assets include both traditional property and deemed property. Traditional property will include non-moveable property, for example, your home, as well as moveable property, which will include your furniture and car. Traditional property will also include incorporeal assets such as stocks, unit trusts and bonds. Deemed property, on the other hand, refers to the lump sum payments you expect from sources such as a retirement fund (this excludes any annuities as this cannot be part of your estate) or any proceeds from a life insurance policy.

Do a similar inventory for your liabilities. Liabilities will include any debts that you may have at present as well as what you expect to pay in the future to foot some core expenses of your dependants. So your liabilities will be any outstanding mortgage or your dependants' college fees. As part of your liabilities, you will also need to take into account any tax commitments you may have at death.

Doing this inventory while still alive is crucial instead of having dependants scrambling to document each and every asset and liability you own. It is also crucial because it allow you to do taxation planning and if appropriate adjust things. Paying taxes is not optional, but you must plan your estate in a way that you will pay only the taxes necessary and that way leave as much benefit as possible for your dependants. Inheritance tax can eat a significant chunk of what they are entitled to and you need to engage a planning professional to help you come up with the best ways to optimize your estate for taxation. You can also use your inventory of liabilities to determine the value of life insurance that you require to satisfy all your personal liabilities at death.

The second step in estate planning is where most people are familiar with-making a will. Preparing a will is important. If you pass away without having made a will (known as dying intestate) the net assets (after paying all of your liabilities) you own will be divided between your relatives using a formula determined by the state. The state may not be privy to family dynamics that would have led you to give more to one person than another.

For instance, a spouse that you might have stopped living with for many years but not necessarily divorced can appear and claim a huge share to the detriment of other relatives, individuals and institutions you may have wanted to give a portion of your estate to. If you had a will, the possibility of this happening reduces drastically. In summary, preparing a will early leaves you in control.

But preparing a will is not a one off event. It is important that you review and revise your will on a regular basis since the circumstances that were at play when you initially prepared it could have changed. For instance, you could be having more children or you could have divorced and remarried. You could also have accidentally left out a friend or relative when you first drafted the will. The majority of banks in South Africa will prepare and execute wills and so can a qualified lawyer or accountant. Costs of preparing a will usually be in the region of R250.

Make sure your will clearly identifies the person that will carry out your will on your passing i.e. the executor of your estate. If you are married, you must factor the possibility that you and your spouse could die at the same time or with a very small time difference. Have a guardian identified in your will in case this happens who will be charged with managing your children's finances before they grow up.