TAX3703 - Taxation of Estates Study Guide (Summary Notes And Revision Questions).

TAX3703 - Taxation of Estates Study Guide (Summary Notes And Revision Questions). What is estate planning? Estate planning enables people to arrange their financial affairs in such a way that they can enjoy maximum benefit from their assets during their lifetime and that their heirs can derive maximum benefit after their (the estate planners') death. Estate planning is a process consisting of two phases. One phase takes place during the planner's lifetime and the other phase happens after the planner's death. Estate planning also involves plans for when someone becomes mentally incapacitated. What is the purpose of estate planning? The purpose of estate planning is to ensure that the process of administration of an individual's estate will proceed without unnecessary problems and more importantly, that dependants will be left properly cared for. There may be many more reasons why an individual wants to do estate planning. These will depend on the planner's circumstances. Generally, the reasons may be to reduce taxes, protect assets from unforeseen creditors and protect beneficiaries. Therefore, everyone should undertake at least some elementary estate planning. What is an estate plan? When developing an estate plan, you will start with setting the objectives of the plan. Once the planner has determined his/her net worth (including assets, liabilities and income), he/she can set the objectives required. The objectives entail deciding in advance what to do with the planner's TAX3703/103 6 assets and liabilities. Once the planner has decided on his/her objectives, he/she decides on the appropriate estate-planning tools that will meet the objectives that have been set. In essence, the objectives and tools to achieve these objectives together make up the estate plan. Remember that an estate plan must be capable of being adapted to changed circumstances. The needs and personal circumstances of a planner are continually changing. This is why estate planning must be regarded as a continuous process. 9.2 OBJECTIVES OF ESTATE PLANNING Common estate-planning objectives are listed below. Each one of them will be discussed in detail.  To achieve efficient deceased estate administration  To appoint heirs or legatees of choice and distribute assets as the estate planner wishes  To avoid fragmentation of assets  To provide for liquidity  To provide for dependants and protect minor beneficiaries  To minimise the impact of taxation on an estate  To provide for future growth of assets outside the estate planner's estate  To provide for an estate planner's own set of unique circumstances  To ensure the plan is practical, legal and efficient  To build in flexibility 9.2.1 Efficient deceased estate administration The plan should provide for the efficient administration of the estate (both during the planner's lifetime and after his/her death) and the safeguarding of documentation. All important estate-planning documents should be kept in one place, where the estate planner, his/her family, and the executor or trustee can readily find them. Some of the estate-planning documents for safekeeping include the following:  The original last will and testament  Identity document  Marriage certificate  Copies of inter vivos trust deed(s) and letters of authority (if applicable)  Banking accounts (account numbers and name on the accounts)  Credit cards  Documents relating to sources of income, for example, loan agreements, salary details, or profit-sharing arrangements TAX3703/103 7  Details of insurance and life insurance policies  Details relating to income tax, for example, income tax number or most recent assessments 9.2.2 Disposition of assets The estate plan should provide for the disposition of the planner's assets to his/her chosen heirs and beneficiaries before and after his/her death. The planner may dispose of assets to one or more inter vivos (living) trusts during his/her lifetime, to testamentary trusts, or directly to heirs and beneficiaries after his/her death in terms of his/her will. Where there is no last will and testament, the estate will be dealt with in terms of the Intestate Succession Act. However, the estate planner's assets may then be dealt with in a manner that was not in accordance with his/her intentions. A last will and testament will include the estate planner's wishes and ensure that his/her assets are transferred to heirs of his/her choice. 9.2.3 Fragmentation of assets An estate may include one or more valuable assets that the planner would prefer not to be sold after his/her death or that cannot be divided among his/her heirs (for example, a family farm). The estate plan should recognise this and make provision for practical bequests in order to avoid fragmentation of assets. 9.2.4 Liquidity An important objective of an estate plan is to avoid liquidity problems on the death of the deceased. Should an estate not be liquid at death (that is, not have enough cash to settle outstanding liabilities), the deceased's family members and dependants may suffer hardship, as they may have to provide the cash themselves or agree to the sale of an asset to generate the cash needed. It would be undesirable to be compelled to sell assets held by the deceased at the date of death in order to settle outstanding liabilities, because the amount recoverable in a forced sale of an asset may be less than market value. There may also be assets in the estate that the planner and his/her heirs would like to keep in the family, for example, a family home or farm. Planning for liquidity means ensuring sufficient cash funds are available in an estate to  pay estate duty  settle liabilities and administration costs  provide for other taxation liabilities that may arise at death such as capital gains tax (CGT) On-going planning for the liquidity needs of an estate is an essential element of estate planning. TAX3703/103 8 9.2.5 Provision for dependants and protection of minors An estate plan must ensure that dependants are adequately provided for during the planner's lifetime and after his/her death. Minor and other vulnerable beneficiaries need to be protected by means of custody or guardianship.