If you think dying will free you of your financial responsibilities, think again. They could haunt you long after you are in your grave.
A mid all the mystery of wills, and the freedom they give the testator to decide the fate of his or her assets, people sometimes get the mistaken impression that anything goes, and they can ignore legal commitments that existed during their lives. This is not so, and there are many areas that present unforeseen problems if they are not thought about beforehand. These are some of them.
Maintenance obligations
As a parent, you are compelled by law to provide for your children until they are self-sufficient ... and this does not necessarily mean only until they turn 21. Illegitimacy does not absolve a parent of responsibility and nor does divorce. If you have not provided for dependent children, your estate may face a maintenance claim.
A surviving spouse who is not provided for in your will is another potential claimant against your estate. The factors that can influence such a claim are, among others, the duration of the marriage, the age of the surviving spouse, his/her ability to find work, the means (assets) your spouse has to provide for himself/herself, the extent of your estate, and the standard of living you and your spouse maintained during the marriage.
A former spouse who is receiving maintenance may also, in terms of the original divorce settlement, have a claim on your assets after you die.
A useful way of ensuring that you meet financial obligations to your children, spouse and/or former spouse is to establish a testamentary trust. Such a trust is set up specifically in terms of your will.
One of the advantages of a testamentary trust is that the capital sum paid into the trust can generate income, which can be used to meet obligations such as maintenance payments. The capital can be protected and preserved and then passed on to another heir after the person receiving the maintenance dies, or after financial obligations to your children have been met and your children are self-sufficient.
A testamentary trust also has a tax benefit, in that it enables you to spread income from the trust between taxpayers with relatively low marginal rates of income tax. For instance, if you left your assets to your spouse to support him or her and your children, your spouse might have to pay a higher marginal rate of tax on the full amount than the individual children would pay if they were receiving payments from a trust.
Insolvent heirs
If an heir is insolvent when you die, the inheritance will form part of his/her insolvent estate and be used to pay his/her creditors.
To prevent this, the benefits should not be bequeathed directly to the heir, but rather to a testamentary trust to be administered for the heir until he/she has been rehabilitated. It is vital to put a time limit on the trust without referring specifically to the rehabilitation. In this way, the inheritance will be preserved for the heir and his/her offspring.
Cohabitation
When you are living with another person and you are both contributing to the household and acquiring assets (as in a marriage), there is often no clear accounting for who owns what.
To avoid conflict and strife among heirs, it is advisable and practical for you and your partner to decide jointly how your assets are to be passed on. This does not necessarily mean that you should draw up a joint will, but that your respective wills should be clear.
Joint wills have no particular advantages, incidentally. Any two people can make one, but the effect is no different from having individual wills.
Complicated business operations
If you have your own business, you should plan for the takeover or continuation of the business in the event of your death. This should be done, preferably, by means of agreements with partners and co-shareholders. And these agreements should be in writing.
Verbal agreements are very difficult to prove after one party to the agreement has died. Anyone can claim to have been in partnership with the deceased. Without a written contract, the courts might have to decide the matter, and even then they would need some form of proof. A person's word alone is just not good enough where money or business is concerned.
Unexecuted contracts
Agreements that you have entered into do not cease when you die, unless such agreements are of a personal nature and require your personal skills. In all other cases, the executor of the estate is bound by the agreements. (An executor has no power to enter into a contract, however, unless you specifically give such powers in your will.)
For example: Steve was a famous artist with a contract to provide a certain gallery with a number of paintings for an exhibition, but he died before he could complete enough works. It would be impossible for the executor to honour this contract because it calls for Steve's particular skills. But if Steve entered into a contract of purchase and sale before his death, his personal skills are not needed and the executor is bound by that agreement.
Accrual claim
If you are married in terms of the accrual system, and your spouse's assets increase less in value during the marriage than yours, your spouse will have a claim against your estate when you die.
Such a claim will be handled like any other claim against the deceased's estate. It is of the utmost importance that your will be planned accordingly - in other words, that there are sufficient assets in your estate to honour a claim in terms of the accrual system.
The appointment of an executor
A vexing question, whatever the content of your will, is who you should appoint as the executor of your estate - to administer your estate in accordance with the provisions of the will and look after the interests of the heirs.
This is an enormous responsibility and the choice of executor should not be made lightly.
It is not always advisable to appoint your surviving spouse as the executor of your estate. Important financial decisions are best avoided when emotions are high and a lack of expertise could expose your spouse to manipulation by people who don't have the best interests of your heirs at heart.
Also, the duties of an executor sometimes go beyond winding up the estate and may entail the administration of a trust over a much longer period in the capacity of a trustee.
Appointing a friend or a relative may not be the best option either, if he or she lacks appropriate skills. If there is any doubt as to competence, the Master of the High Court might require an executor to provide security before he or she will approve the appointment.
It is advisable to appoint a reliable trust company as executor, so you have the benefit of its expertise and can expect your estate to be administered professionally. If the worst happens, and anything goes wrong with the administration of your estate, your heirs will be in a much better position to recover lost funds from a recognised trust company than from an individual.
Finally, remember to review your will regularly to make sure the contents still reflect your wishes.
Berrie Botha is the chief executive officer of Sanlam Trust.
This article was first published in Personal Finance magazine, 4th Quarter 2003. See what's in our latest issue