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Author: kevin Cartmell

Letter of Instruction in Estate Planning: What It Is & Why You Need It 

Written by kevin Cartmell on . Posted in Deceased Estates Administration, Wills & Trusts.

For those unfamiliar with the process, estate planning seems like “just another difficult and arduous legal procedure”. The thought of distributing your property when you are no longer there, is difficult to imagine. There is an easy way to ensure that even the most complex inheritance documents translate accurately and are represented as intended: A Letter of Instruction.  

A Letter of Instruction, also called a Letter of Intent, has the purpose of clearly communicating the intentions of the deceased to the executor (or anyone else who may need to interpret the contents). Such a document supplements the will as a step-by-step guide on how to proceed with estate planning or clarify some detail that was left out of the will.

For example, anyone who receives a Letter of Instruction upon death should know how to proceed with handling of the estate. The final Letter of Instruction should outline the executing the will and also specify who will receive specific or sentimental items. The Letter of Instruction serves as a key to translate the will.

In addition to supplementing a will, the letter also serves as a way for you to express your last wishes in a more personal format. The Letter of Instruction does not have to follow the same rigid structuring as many of its legally binding counterparts, as it has no legal authority in itself, and is not a public document. Because a Letter of Instruction is more personal, such a document usually provides some comfort for the family and simplify the inheritance process for any heirs who may not be familiar with the legal terminology associated with estate planning. Although the executor does not require a Letter of Instruction in order to proceed, such a document will serve as a guide to follow in instances of ambiguity.

Since this is a document without any legal ramifications, there is no prescribed format for a Letter of Instruction. Some contain detailed instructions on how to proceed with the Will, while others simply provide general guidelines to follow, for instance what to do with sentimental items, pets or donations.

The benefits of a well-crafted Letter of Instruction greatly outweigh the drawbacks of not writing one. The natural flexibility and non-legal nature of these letters imply that there is no right or wrong way to write them, but there are a few unwritten rules that you should take note of. Apart from a comprehensive list of all the assets in your possession and instructions for how the executor should disperse these assets, your Letter of Instruction should include the following:

  • A list of each account beneficiary and their contact information
  • Any papers pertaining to your marriage status and/or citizenship
  • Where to find important documents (tax returns, birth certificates, Title Deeds, etc.)
  • The contact information of creditors or policy holders (mortgage, car loan, insurance policies, etc.)
  • The contact information of previous attorneys, accountants, brokers, financial advisors, etc.
  • The date and your ID number
  • The location of any assets that are not easily accessible (including safe deposit boxes and their keys)
  • The login credentials pertaining to any financial accounts you may have (passwords, PIN numbers, account numbers, etc. So make sure the letter of instruction is in good hands.)

A Letter of Instruction looks somewhat like a Will in the sense that they both delegate instructions on what to do with assets and who gets them. However, a Letter of Instruction is not a legal document while a Will is enforced by law. For this reason you should not include the distribution of any assets in a Letter of Instruction that are not already included in the Will. Your Letter of Instruction may be incorporated to enable understanding of the process better and can include burial arrangements or guidance on the memorial service. The addition of a letter of instruction to your Will could expedite the estate planning process and, in addition, you can rest assured that your wishes will be carried out exactly as you have intended.

Most people do not know how to write a letter of instruction (or may feel uncomfortable doing so) and feel more confident if you enlist the services of a qualified professional, such as AED Attorneys for guidance. We know exactly where discrepancies are most likely to arise and are more than equipped to help you address them. AED Attorneys can assist you in getting the paperwork right, and handling the estate.

AED Attorneys understands that every situation is unique, and although they strive to ensure that the information contained herein is accurate at the time of publishing, it cannot be guaranteed to be without errors or omissions. As a result, AED Attorneys, its employees, independent contractors, associates or third parties will under no circumstances accept liability or be held liable for any innocent or negligent actions or omissions in this article, which may result in any harm or liability flowing from the use of or the inability to use the information provided.

Can you inherit debt? What happens to the debt in a deceased estate?  

Written by kevin Cartmell on . Posted in Deceased Estates Administration.

Many people are concerned that they may be liable for their spouse’s debts if the spouse dies and the liabilities of their estate exceed the assets. The short answer is no: heirs do not inherit the debt. If the estate is insolvent all the assets of the estate become liquidated and divided among the creditors. It sounds relatively straight forward but there are certain exemptions and practicalities that one should be aware of. An estate includes all the assets and liabilities, including the debts, property, vehicles, furniture, and the money in your bank account. The assets are used to pay off your outstanding debt before heirs receive their share of the inheritance. In brief, debt is handled as follows:

  • The executor of the estate’s main task is to trace the assets and pay off all debts and liabilities before distributing the remainder to the beneficiaries as stated in the will.
  • If an individual has debt on their assets when they die (e.g. a student loan, vehicle, or house), the loan or financing agreement must still be honoured. Their heirs are not directly liable for the debt, but creditors can prosecute the estate for the full payment (unless the loans were assured). Assets can be used to pay the outstanding amount, but persons who have signed surety for the deceased can become responsible for the debt.
  • When a taxpayer dies, the executor of the estate is required to submit the outstanding tax returns up to the date of death of the deceased person. The executor needs to ensure that the necessary documents are furnished to SARS to be updated.
  • Secured debts are debts that are secured against certain assets, for example when money is borrowed and the property is used as security.  If a debt was not insured (eg credit cards and personal loans), there is no specific asset that can be taken back and sold and the bank has to get a court order that valuables from the estate may be repossessed and sold to pay off the debt.
  • If spouses or business partners have co-signed for debt, it is the responsibility of all parties whose names are listed on the account to settle the debt. If one of the partners dies, their estate can be used to pay off part or all of the debt. If the deceased’s estate has insufficient assets, it will be liquidated and the other account holder(s) will be liable for all outstanding debt.
  • If you are a guarantor on a loan, it will become your responsibility to make the repayments.
  • If you were married within community of property and your deceased partner’s estate is insolvent (i.e. your joint estate), all assets of the estate will be liquidated so that the proceeds can be divided between the creditors. You shall therefore also lose everything from the joint estate, but at least you won’t inherit the debt or have to pay anything toward the deficit.
  • Once the executor has finalised all the administration in the deceased estate, the remaining assets, after paying all the debts, will be distributed to the beneficiaries.

AED Attorneys shall ensure that there are no ambiguities in your will and that your estate is distributed exactly as you have planned.

AED Attorneys understands that every situation is unique, and although they strive to ensure that the information contained herein is accurate at the time of publishing, it cannot be guaranteed to be without errors or omissions. As a result, AED Attorneys, its employees, independent contractors, associates or third parties will under no circumstances accept liability or be held liable for any innocent or negligent actions or omissions in this article, which may result in any harm or liability flowing from the use of or the inability to use the information provided.

To Do or Not to Do: Shall I purchase property in a trust? 

Written by kevin Cartmell on . Posted in Conveyancing.

The word “trust” in a legal sense, originated from the Latin word fiducia, meaning “confidence, courage, security”, and also translates to “pledge” or “guarantee” which indicates a concrete sign of commitment. The Latin word fides, means “faith, conviction, belief” which is more of a reliance without guarantees. This makes us wonder if it could be safer for you to hold property in a trust than in your own name, in which case it forms part of your estate.

Interestingly, the verb that most commonly indicates the beginning of a relationship is “I give you my trust” and the verb that marks the end is “I have lost my trust in you”. So what do you have to give and what is there to lose? Personal circumstances would have an influence e.g. whether you are prone to risks of insolvency, whether your personal income tax rate is already high and if there is a history of mental illness in your family. Let us look at the options that you have when investing in property, and how buying it in a trust could benefit you.

WHAT IT MEANS

  • “Perpetual succession” means that a trust does not “die” and is therefore not liable for estate duty, transfer duty, executor’s or conveyancer’s fees, or capital gains tax (CGT) that might otherwise happen on the death of an owner.
  • A trust is a legal entity that holds assets for the benefit of beneficiaries, on behalf of its founder(s).
  • A trust is not liable for estate duty, transfer duty, executor’s, or conveyancer’s fees.
  • There are administration costs involved in setting up a trust, and it is taxed at the top marginal rate.
  • The founder tasks a trustee or trustees with the management of the trust’s assets for the benefit of one or more beneficiaries.

TO DO (THE PROS)

Property registered in a trust does not form part of your personal estate and is thus protected from creditors. Upon your death, the property would not be wound up in your estate subject to various costs such as estate duty, capital gains tax, executor’s fees, transfer duty (subject to the relevant exemptions), and transfer fees.

Your trust and the property registered therein will not be affected by your death.  If your heirs are beneficiaries of the trust, it should not be necessary to transfer the property into the name of the heirs.   If old age or an illness prevents you from managing your affairs, the trustees would be able to sell the property if need be without your family having to undergo a High Court application to apply for a curator to manage your affairs to sell the property.

Income from the trust’s property is for the trust, and expenses such as repairs, maintenance, water, and rates bills are also for the trust’s account. In the situation where you struggle with an age-related illness to the extent that you are no longer capable of managing your affairs, the property owned by the trust would ensure that your illness does not affect the management of the property.

Having property registered in a trust rather than your own name means the value of your personal estate is reduced, which lessens your estate duty exposure.

If a property is tenanted, the trust will produce an income that would be taxed at a 45% rate. The trustees have the authority to distribute the profits to the beneficiaries to minimise the tax implication. The beneficiaries would then pay tax on such distributed profit according to their own personal tax rate (which would be lower than 45%, depending on your annual income).

NOT TO DO (THE CONS)

There are setup and administration costs involved.

Problems may occur if the trust is not properly established or managed. The trust will be a separate taxpayer, meaning the cost of another tax return. 

If you lend money to the trust, you will have to charge interest at the SARS rate.

If the property is tenanted, the rental would be considered an income earned by the trust which would be taxed at a rate of 45% (whether the rent income is substantial or not). If the property is sold, the capital gains tax percentage is far higher than if the property was owned in your personal capacity. If you utilise the property as your primary residence but it is owned by the trust, there are provisions available but the relevant costs involved could prove the exercise impractical.

If the trust requires finance to purchase property, financial institutions are reluctant to give 100% mortgages. Procedures are far more complex if there is a default in payment, so banks require one or more of the trustees to stand surety for the loan. If the person who signed surety dies, the banks could submit a claim and subsequently sell the house to settle the outstanding bond if the estate does not have sufficient equity. The balance would be paid to the estate.  There is no quick yes or no answer to the question “to do or not to do” when  it comes to trusts, so it is best to make use of expert tax consultants or property practitioners to help you make the right decision taking into account your circumstances and goals. Whether purchasing a property for a trust or in your name, AED Attorneys can advise you about choosing the right option, and assist you in getting the paperwork right.

AED Attorneys understands that every situation is unique, and although they strive to ensure that the information contained herein is accurate at the time of publishing, it cannot be guaranteed to be without errors or omissions. As a result, AED Attorneys, its employees, independent contractors, associates or third parties will under no circumstances accept liability or be held liable for any innocent or negligent actions or omissions in this article, which may result in any harm or liability flowing from the use of or the inability to use the information provided.