ESTATE PLANNING ESSENTIALS

Tiny Carroll, Estate Planning Specialist for Glacier Fiduciary Services, says that when an Estate Planner or Financial Adviser helps you, as a couple or an individual in a permanent relationship, with your Estate plan, he or she should ask you three vital questions about your marital status.

1.  ARE YOU A SPOUSE OR NOT?

The first question is whether you and your partner qualify as “spouses” in terms of the Estate Duty Act, because the first-dying spouse can leave assets to the other free of Estate Duty, and the second-dying spouse can make use of any unused portion of the Estate Duty Exemption of the first-dying spouse to offset any Estate Duty that his or her Estate may attract.

Estate Duty is levied at 20 percent of your Estate, but the Estate Duty Act exempts from duty, any amounts left to a spouse as defined in the Act, as well as the first R3.5 million of your net Estate (after liabilities have been deducted).

If the first-dying spouse does not use the full R3.5 million Exemption, which is often the case when spouses leave everything to each other, the Estate of the second-dying spouse is entitled to use any unused portion of that Exemption, known as the “Rollover of Estate Duty Exemption”. This means the Estate of the second-dying spouse could enjoy an Estate Duty Exemption of up to R7 million.

The Estate Duty Act defines a spouse as someone who was, at the time of the death of the deceased, a partner of such person:

  • In a marriage or customary union recognised in terms of South African law;
  • In a union recognised as a marriage in accordance with the tenets of any religion; or
  • In a same-gender or heterosexual union that the Commissioner of the South African Revenue Service (SARS) is satisfied is intended to be permanent.

* If you are married in Community of Property, the Executor will deal with the Joint Estate when the first spouse dies. Joint assets could be frozen, creating problems for the surviving spouse who does not have his or her own accounts (see “When assets are frozen”, below).

On the death of the first spouse, Executor’s Fees of up to 3.99 percent of the Estate will be payable on the entire Estate. Estate Duty will apply only to 50 percent of the assets. Executor’s Fees will also be levied on the Estate of the second-dying spouse. If the first-dying spouse leaves all his or her assets to the second-dying spouse, this could mean Executor’s Fees are paid twice on the same assets.

Couples married in Community of Property need to be aware that they each own 50 percent of the Joint Estate and to take care when bequeathing assets to anyone other than the surviving spouse.

* If you are married Out of Community of Property with Accrual and the surviving spouse has an accrual claim against the Estate, this will be a liability against the Estate that must be deducted before the Estate can be distributed to the beneficiaries named in the Will.

There may not be a problem if the first-dying spouse leaves his or her entire Estate to the surviving spouse, but a problem could arise if the first-dying spouse bequeaths certain assets to another party, leaving insufficient readily realisable assets in the Estate to meet the Accrual Claim.

For example, a businessman leaves his business to his children from a previous marriage and his home, worth R1.5 million, to his wife. Both spouses had no assets when they married, but the husband amassed an Estate that, net of liabilities, amounted to R7 million by the time he died. The surviving spouse has a net Estate of only R1 million. The Accrual Claim would be R3 million ([R7 million – R1 million] ÷ 2). There may well be a shortfall in liquid assets in the Estate to meet the R3 million accrual claim.

Also consider the problems that could arise if the wife, with a net Estate of only R1 million, dies first, leaving her assets to her children from a previous marriage, and the Estate has an accrual claim against the surviving spouse, the husband. The husband, with the R7-million Estate, will need to find R3 million to pay into the Estate of his wife. He may have to sell his business so that the Executor can distribute the assets to the heirs of the wife.

You should also remember that a life policy on the life of the deceased that pays into the Estate can influence the accrual claim. In the case of the first-dying spouse having a bigger net Estate, a policy that pays into the Estate will increase the Accrual Claim for the surviving spouse.

* If you are married out of Community of Property without Accrual, or are partners in religious unions or domestic partnerships, the Estates will be dealt with separately and there will be no debts owed from one to another unless there is a maintenance obligation (see below).

If you were married in Community of Property, Out of Community of Property with or without Accrual, by religious rites or by customary rites, you should have a marriage certificate and therefore have no problem proving you qualify as a spouse in terms of the Estate Duty Act.

Partners in same-gender or heterosexual unions recognised under the Civil Union Act should also have no problem, but those whose unions are not formally recognised need to prove to the Commissioner of the SARS that they were in a permanent relationship before they may bequeath all their assets to each other without incurring any Estate Duty. Carroll says you need the best proof possible, which is probably a Cohabitation Agreement, but an Affidavit made by the partners may also be adequate.

Wessel Oosthuizen, the Director of the Centre for Financial Planning Law at the University of the Free State, says that to recognise a union as permanent for the purposes of the Estate Duty Act, the Commissioner will need proof of the permanency of the relationship. He says an Affidavit to that effect from a relative may not suffice as proof.

To take advantage of the remaining portion of a deceased spouse’s Estate Duty Exemption, as well as your own Exemption (in other words, an Exemption of up to R7 million), you will need the Estate Duty return of the deceased spouse and proof of your marriage, religious marriage or permanent relationship.

Carroll says it costs R9 to get a copy of the Estate Duty return of the first-dying spouse from the Master of the High Court, and you should file this document with your other important documents.

2.  IS THERE AN ANTENUPTIAL CONTRACT?

The second question the Estate Planner needs to ask a couple is whether there is an Antenuptial Agreement.

An Antenuptial Agreement is a written contract made by two people before they marry that sets out the terms of the possession of assets, the treatment of their future earnings, the control each partner will have over the property of the other, and the division of assets if the marriage is dissolved.

If there is no antenuptial contract, the Estate Duty Act states that the marriage should be regarded as being In Community of Property, but Carroll says an Estate Planner should not just accept that the absence of an Antenuptial Contract means the marriage is In Community of Property.

For example, he says, people married in the United Kingdom are automatically married in terms of a system which is similar to South Africa’s Out-of-Community-of-Property marital regime.

Polygamous customary marriages entered into before November 15, 2000 and governed by customary law are regarded as Out of Community, and if the Muslim Marriages Bill comes into effect as proposed, the automatic regime for these marriages will be Out of Community of Property.

Carroll says that your Estate Planner should also check whether any assets have indeed been excluded from an Out-of-Community-of-Property Estate to which Accrual applies. To do this, your Planner must see your Antenuptial Agreement, Carroll says.

A Testator or Donor can leave or donate an asset to you subject to a provision that excludes the asset from an In-Community-of-Property Estate or one to which an Accrual Claim could apply. In terms of the Matrimonial Property Act, such an asset is excluded from the Accrual calculation.

However, the Matrimonial Property Act does not say anything about assets received before the marriage. Carroll says that, unless such an asset is excluded in the Antenuptial Contract, it will be assumed that the parties intended that it should be included, and the asset will be taken into account when calculating the Accrual Claim.

3. WAS THERE A PREVIOUS MARRIAGE? 

The third question your Estate Planner needs to ask is whether or not you are a surviving spouse of any previous marriage, as this may entitle you to an unused portion of the Estate Duty Abatement.

Carroll says if more than one spouse has predeceased you, your Executor can choose to roll over to your Estate the highest unused Estate Duty Abatement from the Estates of the spouses who predeceased you.

OTHER TAXES 

In planning your Estate, couples should be aware that the definition of a spouse in terms of the Income Tax Act is essentially the same as it is in the Estate Duty Act. In terms of the Income Tax Act, spouses are entitled to make donations to each other free of donations tax.

If an asset is transferred to a spouse, the Income Tax Act also provides for rollover relief on any CGT that may apply to the Capital Gains made on an asset. Death is regarded as a disposal for CGT purposes, but if the asset is left to a surviving spouse, as defined by the Income Tax Act, rather than to a third party, the surviving spouse is treated as having obtained the asset at the same time, at the same cost, in the same currency, and for use in the same manner as the original owner. Only when the surviving spouse dies, will the CGT need to be paid.

The Transfer Duty Act exempts from Transfer Duty any property transfer made as a result of a death.

MAINTENANCE OF SURVIVING SPOUSE

Ideally, the spouse with greater earning capacity should make provision for the one of lesser means, so that, in the event of his or her death, the surviving spouse can maintain the standard of living to which he or she has become accustomed.

Typically, the spouse with greater earning capacity or assets would make provision by way of a life policy or by bequeathing assets to the surviving spouse.

Instances do, however, arise, particularly in cases where one or both spouses are in a second marriage, where the first-dying spouse leaves assets to someone other than the surviving spouse – for example, children from a previous marriage – and the surviving spouse is left worse off.

In this case, the surviving spouse can lay a claim in terms of the Maintenance of Surviving Spouses Act against the Estate of the deceased spouse. This Act, which was promulgated in 1990, states that the surviving spouse who is not able to provide for his or her “reasonable maintenance needs” from his or her own means and earnings can claim from the Estate for these needs until his or her death or re-marriage. This claim, will, however, have the same status as a claim for maintenance for a dependent child of the deceased.

The Act also says that the Executor of the Estate of the deceased shall have the power to enter into an agreement with the survivor and the heirs and legatees who have an interest in such an agreement. It also gives the Executor power to set up a Trust for the survivor, or to impose an obligation on an heir or legatee to settle the claim of the survivor.

When determining “reasonable maintenance needs”, the Act states that the following factors should be considered:

* The amount in the Estate that is available for distribution to the heirs and legatees;

* The existing and expected means, earning capacity, financial needs and obligations of the survivor, and how long the marriage lasted; and

* The standard of living of the survivor during the marriage and his or her age when the deceased died.

The rights of a surviving spouse under this Act were tested in a case that came before the Supreme Court in 2010. The case illustrates how important it is to secure necessary income for a spouse who is incapable of supporting his or herself.

Marjorie Feldman married Lionel Feldman Out of Community of Property when she was 60 and he was 70. They remained married for 18 years until he died in 2005. They each had two children from a previous marriage.

Marjorie Feldman worked until she was 75 and thereafter was supported by Lionel Feldman. In his Will, Feldman left Marjorie Feldman only R150 000. The balance of his Estate was left to his children.

After her husband’s death, Marjorie Feldman instituted a claim against Lionel Feldman’s Estate for R671 000 for maintenance. The Estate’s Executors, Lionel Feldman’s daughter and son-in-law, Beverly and Stanley Oshry, denied the claim, saying Marjorie Feldman’s sons were obliged to maintain her.

Both the Durban High Court and the Supreme Court found in Marjorie Feldman’s favour. The Supreme Court of Appeal said Marjorie Feldman could not compel her children to support her unless she had taken all the necessary steps to enforce her rights against her husband.

The Supreme Court, however, found there were insufficient assets to pay the lump sum required for maintenance, as R819 000 of the R1.3-million Estate was the proceeds of policies in which Lionel Feldman had named his son and daughter as beneficiaries. Marjorie Feldman could not claim against these proceeds.

Of the remaining R528 000 in the Estate, the court estimated that about R200 000 would remain after the funeral costs, bequests, legal fees (R122 000) and Executor’s fees were paid. The court ordered that the Executors pay this residue of the Estate as a lump sum to Marjorie Feldman for her maintenance claim.

The judges had harsh words for the Executors, saying it was regrettable that they had adopted an intractable and obstructive attitude to Marjorie Feldman’s maintenance claim and subjected the aged and vulnerable Ms Feldman, then in her eighties, to protracted litigation.

“The parties are the poorer for it, materially, as well as in human currency,” the judgment says.

DYING INTESTATE

Ideally, each spouse or partner in a relationship should have a Will and provide for each other in the event of one dying before the other. In reality, spouses or partners often do not make Wills, or one of them does not make a Will or one of their wills is declared invalid. In these cases, the deceased is said to have died Intestate and the Intestate Succession Act will determine how the surviving spouse or partner will inherit from the other.

The Act states that if the person who dies intestate is survived by a spouse, but not a descendant (a child), the spouse will inherit the Estate. If the deceased had a spouse and children, the Estate is divided equally among the children and the spouse, but the spouse must inherit at least the amount set by the Minister of Justice. That amount is currently R125 000. If a child has pre-deceased the spouse, but is survived by his or her children, the deceased child’s portion must go to his or her children.

Further provisions are made for those who die Intestate without a spouse or a children.

PARTNERSHIPS:  LEGAL GREY AREAS

The Intestate Act does not define a spouse, and the Maintenance of Surviving Spouses Act defines a “survivor” as the surviving spouse in a marriage dissolved by death and, under certain conditions, a woman in a customary marriage that was dissolved by her husband entering into a civil marriage.

This means surviving partners of long-term partnerships, including marriages not recognised by the Marriage Act, Civil Union Act or Recognition of Customary Marriages Act, who believe they should inherit from their long-term partners’ Intestate Estates or want to claim maintenance from their partners’ Estates may have difficulty doing so.

Recent court cases have found in favour of long-term partners not in marriages or partnerships recognised by the Marriage Act, Civil Union Act or Recognition of Customary Marriages Act. But despite this, the Executors of Deceased Estates are not able to automatically recognise a partner in a permanent relationship, because these partners are still not recognised as such for the purposes of the Intestate Succession Act and the Maintenance of Surviving Spouses Act, Oosthuizen says.

He says the cases do not change the legislation itself; a legislator must change the law. This means that surviving partners of a heterosexual or same-gender partnership, or a partnership recognised in terms of a religion but which is not solemnised in terms of the Marriage Act, Civil Union Act or the Recognition of Customary Marriages Act, will have to apply to court for a ruling in their favour before they can qualify to inherit from an Intestate Estate or claim maintenance from a deceased estate, Oosthuizen says.

Applying to a court would delay the winding up of the Estate and is also likely to incur legal costs. It is thus better to ensure that your partner provides for you by way of an agreement between you, a valid will or a life policy in which you are named as the beneficiary. There is, however, a risk that a will or life policy naming you as the beneficiary could be changed without your knowledge.

However, should your partner have pre-deceased you without providing for you, the following cases may be of interest.

The first is a Constitutional Court case handed down in 2004, Daniels versus Campbell NO & Others. In this case the court found it was discriminatory and unconstitutional to read the word “spouse”, in both the Maintenance of Surviving Spouses Act and the Intestate Succession Act, in a narrow context, meaning only those marriages recognised under the Marriage Act.

The case concerned Soraya Daniels, a domestic worker and the surviving spouse of a monogamous Muslim marriage, who, after her husband died without a Will, stood to lose the home to which she had contributed financially. Daniels was married by Muslim rites, but the marriage was not solemnised under the civil law by a marriage officer.

The Master of the Court told Daniels she could not inherit from the Estate because her marriage was not recognised and she was not a spouse in terms of the Intestate Succession Act. She was also told she would not be able to claim maintenance from the Estate because her marriage was not recognised in South Africa and she was not regarded as a spouse.

Daniels approached the Cape High Court, which ruled in her favour, saying that it was unconstitutional for the Intestate Succession Act and the Maintenance of Surviving Spouses Act to recognise only spouses of civil marriages. It ordered that words be “read in” to both Acts to broaden the definition of a spouse.

The Executor appealed the matter and the Constitutional Court finally ruled that “spouse” in these Acts should be understood in its ordinary broad sense and should hence include Soraya Daniels.

Later, in 2009, another case relating to a Muslim marriage that was not solemnised in law was heard by the Constitutional Court. In Hassam versus Jacobs, the court decided that there was no justification for not including widows of polygamous Muslim marriages from the provisions of both the Maintenance of Surviving Spouses Act and the Intestate Succession Act.

Also in 2009, in the case of Govender versus Ragavayah, the Durban High Court established the right of a woman married by Hindu rites to inherit intestate from her husband. Saloshinie Govender married Balasundran Narainsamy in 2004. He died intestate on January 1 2007, and Narainsamy Ragavayah, Narainsamy’s father, was appointed Executor of the Estate.

The Executor said Govender had no right to inherit from her husband’s Estate because the marriage had not been solemnised in a civil court, Govender was a housewife who did not contribute constructively to her husband’s Estate, her husband had been unhappy with her because she could not conceive, and she had broken ties with the family.

Govender cited the Daniels case and said she had assisted her husband in his business, attending to administration and bookkeeping, and she had supported and cared for him during their marriage.

The court held that the word “spouse” in the Intestate Succession Act does include the surviving spouse of a monogamous Hindu marriage that has not been solemnised in a civil court.

Marriages in terms of Muslim and Hindu rites are generally regarded as being Out of Community of Property, Margeret Meyer, a law lecturer at the Justice College, says in a document titled “Who is a spouse for purposes of intestate succession?” on the Department of Justice and Constitutional Development’s website. (The Justice College is a training branch within the department that trains Magistrates, Prosecutors and other Legal Officials).

 

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