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Demystifying the executor in a deceased estate

Demystifying the executor in a deceased estate

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During a person’s lifetime s/he will gather assets, in other words, belongings such as a house or a motor vehicle. These assets and liabilities will form part of a person’s estate. At the death of that person, his/her deceased estate must be administered, in other words, divided, distributed and controlled by someone. This person is called an executor.

However, the role of an estate executor and who can be appointed as one has been largely misunderstood.

What does the executor do?

“Executor” is the legal term for referring to the person, or people, nominated in your will to carry out the directives you set out in your will.

  1. This means that it is the executor’s responsibility to disburse your property to the mentioned beneficiaries in your will, but also obtain information on potential heirs, collecting and arranging payments, and approving or disapproving creditors’ claims.
  2. It is the executor’s duty to calculate and pay the estate tax, and to ensure that the correct documentation is filed with the relevant authorities.
  3. The executor is the individual that represents your estate.

Who can be appointed as the executor?

It has become normal to appoint a friend, family member or beneficiary to act as the executor, as they most likely have intimate knowledge of your estate and your affairs, but also, they will not rack up the fees that a legal body might accrue.

However, there is a misconception that you can avoid the fees by appointing a family member as the estate executor, but this could also mean that you are deferring the cost to the nominated family member.

  1. Family members appointed as executors on larger estates immediately find themselves out of their depth, and not only end up hiring a professional executor, but may also pay more for these services than necessary.
  2. A simple way to address this is by appointing a “professional” executor during your lifetime. This allows you to negotiate the executor fees.

If you appoint a family member, make sure that they understand that they will have to appoint a professional agent, and that they should negotiate the fee and be very cautious of agreeing to a fee arrangement in terms of which the professional agent charges their professional fee, instead of the legislated scale.

References:

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
What is the cost of my estate duty?

What is the cost of my estate duty?

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In terms of the stipulations of section 4 of the Estate Duty Act No 45 of 1955 certain deductions from the value of an estate are allowed in order to determine the final value of the estate which will be subject to estate duty.

The following two rebates are the most well-known:

  • Section 4(q) – This is the total value of all the benefits bequeathed to the surviving spouse. The value of a usufruct also qualifies as an Article 4(q) rebate; and
  • Section 4A – This is the value of the rebate applied to all estates, which is currently R3.5 million.

Given the value of the section 4A rebate you can rest assured that your estate will not be accountable for estate duty if the net value (assets minus liabilities) is less than R3.5 million. The amount with which your estate exceeds R3.5 million will, however, be taxable for estate duty at 20%.

The Taxation Laws Amendment Act, 2010, amended the section 4A rebate by allowing the part of the R3.5 million rebate not used by the estate of the first deceased spouse to be carried over to the estate of the surviving spouse. This amendment applies to the estates of individuals passing away after 1 January 2010.

The carried over rebate between spouses can be illustrated with the following example:

  • Mr A, who is married to Mrs A, passes away. The net value of his estate is R800 000 after the rebate according to Article 4(q) has been calculated.
  • This amount is bequeathed to his children and therefore not deductible for estate duty.
  • There is no accountability for estate duty as Mr A’s estate only used R800 000 of the section 4A rebate of R3.5 million.
  • At Mrs A’s passing the net value of her estate is R8 million. The following rebate is applicable to her estate: Section 4A rebate to the value of R7 million minus the R800 000 deduction already utilised in the estate of Mr A.
  • Mrs A’s estate will therefore pay estate duty on R1.8 million (R8 million minus R6.2 million).
  • R1.8 million @ 20% = R360 000.

We have to put the utmost stress on the importance of estate planning and a will which gives you the best benefits regarding the composition of your assets and liabilities should the net value of your estate exceed R3.5 million. This does not mean that the use of trusts becomes obsolete in estate planning due to the larger rebate in the surviving spouse’s estate. There are still valid reasons why the bequeathment of a trust by the first deceased is an excellent option, even though it does not initially effect a saving in estate duty. In case of such a trust the assets can be managed by the trustees to the benefit of the surviving spouse and children. A small effort today for much peace of mind tomorrow!

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Is it beneficial to create a Trust?

Is it beneficial to create a Trust?

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A Trust can be described as a legal relationship which has been created by the founder, who places assets under the control of Trustees. This either happens during the founder’s lifetime (inter vivos trust) or at the death of the founder (testamentary trust). This article will focus on the advantages and disadvantages of an inter vivos trust.

The advantage of a trust is firstly, that inter vivos trusts can be used to minimise estate duty. No estate duty should be payable on assets owned by the Trust as a Trust does not terminate or come to an end, since it has perpetual succession. Estate duty is currently taxed at 20% of the gross estate value. This saving in estate duty can be substantially large, especially for high net worth individuals who are worth millions of rands. Secondly, as the Trust’s assets are not owned by the beneficiaries, the creditors of the beneficiaries do not have a claim regarding the assets of the Trust. This advantage is especially important for people who are exposed to potential liability. Companies as well as individuals are able to transfer assets to Trusts. Lastly, because Trusts have perpetual succession, beneficiaries will be able to continue enjoying the benefit of the Trust assets even if one of the Trustees were to pass away.

The disadvantages are firstly, the costs of setting up a Trust, which can be high. It may cost up to R 20 000 to set up a Trust. If immovable property is transferred to the Trust then transfer duty needs to be paid. The founders of the Trust may also be liable to pay Donations tax, which is taxable at 20% of the value of the assets transferred to the Trust. Transfer duty is taxed according to a sliding scale. Secondly, Trustees could find themselves personally liable for losses suffered by the Trust if it can be proven that they did not act with care, diligence and skill in terms of section 9 of the Trust Property Control Act. It is important to note that “skill” requires more than just acting in good faith. Trustees may be proven to be negligent not only if they invested in risky investments, but also if they invested capital too conservatively, causing the capital not to grow sufficiently. Trustees also need to be aware of the fact that they can still be held liable if only one Trustee has signing power on behalf of the Trust and he/she makes a poor decision that holds all the Trustees liable for his negligence.

The founder of the Trust needs to recognise that the assets in the Trust do not belong to him/her anymore. The assets belong to the Trust. Should this loss of control (from founder to Trust) not occur, the Trust may be seen as an alter ego of the founder, which could result in the assets being included in creditors’ claims as well as having estate duty consequences.

The earnings from the assets in the Trust are taxed at 40%, and interest exemptions do not apply to Trusts. Also, the inclusion rate for Capital Gains tax for an inter vivos trust is 66.6% whereas the inclusion rate for individuals is 33.3%. Lastly, as we can see from the above, a Trust is not for everyone.

It is important to weigh up the advantages and disadvantages before deciding whether to go ahead or not. The best decision would be to speak to a certified financial planner or attorney who can assist you in making the correct decision regarding your personal situation.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)