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Cape Town - Think about it: your will could be the most important document you will ever sign. Once drawn up and signed, most of us hardly give it any further thought - yet in some instances, an outdated will with wording that is no longer appropiate can be more harmful than having no will at all.
Tiny Carroll, fiduciary specialist at Glacier by Sanlam, outlines 10 phrases with the potential to cause great damage:
1. Children nominated by name
If you have nominated your children by name - for example, I leave my estate to my son John - and in the meantime you have had, say, a daughter Mary, she will be disinherited because she has not been appointed as an heir.
Unless there is a specific reason for nominating children by name, it is safest simply to call them "my children"; this will include any adopted children.
2. A bequest to “our children” or “the children born from our marriage”
A bequest to "our children" or "children born from our marriage" could also lead to problems of interpretation.
By way of example, Paul and Jane in a joint will leave their estate to "our children" or "children born from our marriage". Paul and Jane later divorce, and Jane has two further children from her second marriage.
Many years later, Paul dies without having amended his will. How will the phrase "our children" be interpreted? Will Mary’s two children from her later marriage also inherit? Alternatively, in the event of Mary’s death her two children from the later marriage may be disinherited because of the reference to "the children born from our marriage".
It is better to ensure that your will is worded correctly than to leave the destination of your estate to a court's interpretation.
3. A bequest to “my spouse”
You may have bequeathed your estate to "my spouse" – without naming him or her.
If you have divorced and remarried, the question of which spouse then arises. Did you mean the spouse to whom you were married at the time of drafting the will, or your present spouse? In this case, it is best to name your spouse.
4. Divorce
The Wills Act provides that if a person dies within three months of becoming divorced, his/her will must be implemented as if the spouse the person who died was divorced from, predeceased him/her.
After three months the old will revives and an ex-spouse from whom you are now divorced will inherit.
It is probably advisable to amend your will at the commencement of divorce proceedings; it is highly unlikely that you would want someone you are divorcing - often in the most acrimonious circumstances - to inherit from you.
5. Bequest to a "family trust"
If you have bequeathed your estate to a "family trust", you need to ensure that:
6. The accrual claim
Your will must take account of an accrual claim.
On dissolution of a marriage subject to the accrual system, the accruals of each estate are calculated according to a statutory formula and an equalisation takes place.
This is done by granting the spouse with the smaller accrual a claim for half of the difference in the respective accruals. If the spouse with the smaller accrual leaves his estate to a child without taking his accrual claim into account and dies first, the surviving spouse will have to find the means with which to settle the accrual liability.
For example, Elise and Bradley are married with the accrual. Bradley owns a motorcycle and a small bank account. Elise, on the other hand, owns and runs a very successful business. In addition to the business, she owns their primary residence and several other properties.
Bradley, mistakenly, believes that if he leaves his estate to his son Michael he will only inherit the motorcycle and the cash in the bank account. However, because of the accrual claim in Bradley’s favour, Michael will inherit several million rands. Elise will be forced to liquidate part of her estate to settle the accrual debt which will be inherited by her son.
The fortunes of spouses may also be reversed over time. A spouse who once had the accrual claim may now be the one who has the bigger accrual and is liable to settle the accrual claim.
If you are married subject to the accrual system, you should ensure that you have an accrual calculation done before finalising your will.
If you have had a will drafted without specifically ensuring the extent of the accrual claim, your will may be out of date.
7. Trusts created for minor beneficiaries
Did you intend a minor beneficiary to be someone under the age of 21? The Children’s Act was amended in 2005 to reduce the age of majority from 21 to 18 years. If your will indicates that your beneficiaries may only inherit once they reach majority, they may in fact inherit three years earlier than you intended them to.
You may even have stipulated that a beneficiary will not inherit until he or she reaches the age of 25, or any age over 18.
A bequest to a minor may be claimed by that erstwhile minor as soon as he or she reaches the age of 18 (even though you stipulated 25) unless there is some form of "sanction", stipulated in the will, which prevents the beneficiary from claiming the inheritance.
Imposing an age restriction on a bequest without any form of sanction is known as a "nude restriction". The "sanction" usually states that if the beneficiary, after reaching majority, takes steps to claim an inheritance being held in trust for his/her benefit, that beneficiary will forfeit the inheritance in favour of someone else.
Careful reading of your will is the key to see whether the age restriction imposed on a bequest will be enforceable or not.
8. Bequest of loan accounts
It is no longer necessary to use the somewhat contrived construction of "bequeathing an amount equal to a loan account, due by a trust, back to that trust". This construction was used to avoid having to paying capital gains tax on the "writing off of a loan account".
Paragraph 12(5) of the Eighth Schedule - the provision which made this construction necessary – was deleted, with effect from March 1 2013. It is now possible to bequeath the loan account to the trust.
If you still have the old construction in your will, you should consider updating it - particularly if your estate does not necessarily have the cash flow to deal with the bequest of cash to the trust, albeit temporarily.
9. The R3 500 000 abatement bequest
The dutiable value of an estate is calculated by first deducting allowable deductions, including liabilities, from the gross value of an estate, which leaves the net value of the estate.
An abatement (now referred to as a deduction) of R3 500 000.00 (Section 4A) is deductible from the net value of each estate to arrive at the dutiable estate.
Previously this was a "use it or lose it" provision, meaning that if a deceased person left his entire estate to a surviving spouse he/she would not have enjoyed the benefit of the estate duty relief on the R3.5m. The surviving spouse was also only entitled to a deduction of R3.5m.
In order to ensure that both spouses benefited from the concession, the first R3.5m was bequeathed to a trust, for obvious reasons referred to an abatement trust.
All of this changed in 2010 and a second-dying spouse is now entitled to a deduction of R7m reduced by the portion of the deduction used by a predeceased spouse.
The changes to the Estate Duty Act have prompted a number of testators to abandon the idea of using an abatement trust.
If you have rejected the concept of an abatement trust on the strength of the roll-over formula, here are three reasons to reconsider that decision:
- The abatement trust could protect assets from the creditors (one could add predators) of a surviving spouse.
- By leaving assets to an abatement trust, the growth on the R3.5m is removed from the estate of the surviving spouse.
- The R7m rollover concession has in effect become a "use it or lose it" provision. This can be explained by way of the following example:
John and Elizabeth are married to each other but are the surviving spouses of marriages terminated by the deaths of their respective spouses. In each case, John and Elizabeth inherited the entire estate of their predeceased spouse.
The couple will now be entitled to a deduction of R7m each, together R14m.
If John bequeaths R7m to an abatement trust and the balance of his estate to Elizabeth, he will not pay any estate duty. In her estate, Mary would also qualify for her own R7m concession. Together they have benefited from a R14m concession.
If John does not use an abatement trust and leaves his entire estate to Elizabeth, he will not be liable for estate duty but Elizabeth will still only qualify for a R7m concession. Together they now only use R7m of the R14m available to them.
They will have squandered R1 400 000 in unnecessary estate duty (20% of R7m).
10. Don't get tripped up by tax avoidance schemes
It is important to remember that your will must reflect your wishes. It is fairly common to meet clients who have had wills drafted on the basis of some so-called clever estate duty avoidance scheme and who, sadly, have no idea of the exact nature of the bequests in their will.
It may be worth pointing out that very often the avoidance schemes were motivated on the basis of unsustainable assumptions, and while they may look good in theory they don’t work in practice.
Do ensure that you understand your will, and that the meaning of each clause is crystal clear to you. Read it, then re-read it and question the draftsperson until you are absolutely certain that your will is a true reflection of your specific requirements.
Tiny Carroll, fiduciary specialist at Glacier by Sanlam, outlines 10 phrases with the potential to cause great damage:
1. Children nominated by name
If you have nominated your children by name - for example, I leave my estate to my son John - and in the meantime you have had, say, a daughter Mary, she will be disinherited because she has not been appointed as an heir.
Unless there is a specific reason for nominating children by name, it is safest simply to call them "my children"; this will include any adopted children.
2. A bequest to “our children” or “the children born from our marriage”
A bequest to "our children" or "children born from our marriage" could also lead to problems of interpretation.
By way of example, Paul and Jane in a joint will leave their estate to "our children" or "children born from our marriage". Paul and Jane later divorce, and Jane has two further children from her second marriage.
Many years later, Paul dies without having amended his will. How will the phrase "our children" be interpreted? Will Mary’s two children from her later marriage also inherit? Alternatively, in the event of Mary’s death her two children from the later marriage may be disinherited because of the reference to "the children born from our marriage".
It is better to ensure that your will is worded correctly than to leave the destination of your estate to a court's interpretation.
3. A bequest to “my spouse”
You may have bequeathed your estate to "my spouse" – without naming him or her.
If you have divorced and remarried, the question of which spouse then arises. Did you mean the spouse to whom you were married at the time of drafting the will, or your present spouse? In this case, it is best to name your spouse.
4. Divorce
The Wills Act provides that if a person dies within three months of becoming divorced, his/her will must be implemented as if the spouse the person who died was divorced from, predeceased him/her.
After three months the old will revives and an ex-spouse from whom you are now divorced will inherit.
It is probably advisable to amend your will at the commencement of divorce proceedings; it is highly unlikely that you would want someone you are divorcing - often in the most acrimonious circumstances - to inherit from you.
5. Bequest to a "family trust"
If you have bequeathed your estate to a "family trust", you need to ensure that:
- The trust is valid, and still in existence;
- The trustees are empowered to accept the inheritance; and
- The trust will continue after your death for the benefit of the beneficiaries nominated in the trust deed.
6. The accrual claim
Your will must take account of an accrual claim.
On dissolution of a marriage subject to the accrual system, the accruals of each estate are calculated according to a statutory formula and an equalisation takes place.
This is done by granting the spouse with the smaller accrual a claim for half of the difference in the respective accruals. If the spouse with the smaller accrual leaves his estate to a child without taking his accrual claim into account and dies first, the surviving spouse will have to find the means with which to settle the accrual liability.
For example, Elise and Bradley are married with the accrual. Bradley owns a motorcycle and a small bank account. Elise, on the other hand, owns and runs a very successful business. In addition to the business, she owns their primary residence and several other properties.
Bradley, mistakenly, believes that if he leaves his estate to his son Michael he will only inherit the motorcycle and the cash in the bank account. However, because of the accrual claim in Bradley’s favour, Michael will inherit several million rands. Elise will be forced to liquidate part of her estate to settle the accrual debt which will be inherited by her son.
The fortunes of spouses may also be reversed over time. A spouse who once had the accrual claim may now be the one who has the bigger accrual and is liable to settle the accrual claim.
If you are married subject to the accrual system, you should ensure that you have an accrual calculation done before finalising your will.
If you have had a will drafted without specifically ensuring the extent of the accrual claim, your will may be out of date.
7. Trusts created for minor beneficiaries
Did you intend a minor beneficiary to be someone under the age of 21? The Children’s Act was amended in 2005 to reduce the age of majority from 21 to 18 years. If your will indicates that your beneficiaries may only inherit once they reach majority, they may in fact inherit three years earlier than you intended them to.
You may even have stipulated that a beneficiary will not inherit until he or she reaches the age of 25, or any age over 18.
A bequest to a minor may be claimed by that erstwhile minor as soon as he or she reaches the age of 18 (even though you stipulated 25) unless there is some form of "sanction", stipulated in the will, which prevents the beneficiary from claiming the inheritance.
Imposing an age restriction on a bequest without any form of sanction is known as a "nude restriction". The "sanction" usually states that if the beneficiary, after reaching majority, takes steps to claim an inheritance being held in trust for his/her benefit, that beneficiary will forfeit the inheritance in favour of someone else.
Careful reading of your will is the key to see whether the age restriction imposed on a bequest will be enforceable or not.
8. Bequest of loan accounts
It is no longer necessary to use the somewhat contrived construction of "bequeathing an amount equal to a loan account, due by a trust, back to that trust". This construction was used to avoid having to paying capital gains tax on the "writing off of a loan account".
Paragraph 12(5) of the Eighth Schedule - the provision which made this construction necessary – was deleted, with effect from March 1 2013. It is now possible to bequeath the loan account to the trust.
If you still have the old construction in your will, you should consider updating it - particularly if your estate does not necessarily have the cash flow to deal with the bequest of cash to the trust, albeit temporarily.
9. The R3 500 000 abatement bequest
The dutiable value of an estate is calculated by first deducting allowable deductions, including liabilities, from the gross value of an estate, which leaves the net value of the estate.
An abatement (now referred to as a deduction) of R3 500 000.00 (Section 4A) is deductible from the net value of each estate to arrive at the dutiable estate.
Previously this was a "use it or lose it" provision, meaning that if a deceased person left his entire estate to a surviving spouse he/she would not have enjoyed the benefit of the estate duty relief on the R3.5m. The surviving spouse was also only entitled to a deduction of R3.5m.
In order to ensure that both spouses benefited from the concession, the first R3.5m was bequeathed to a trust, for obvious reasons referred to an abatement trust.
All of this changed in 2010 and a second-dying spouse is now entitled to a deduction of R7m reduced by the portion of the deduction used by a predeceased spouse.
The changes to the Estate Duty Act have prompted a number of testators to abandon the idea of using an abatement trust.
If you have rejected the concept of an abatement trust on the strength of the roll-over formula, here are three reasons to reconsider that decision:
- The abatement trust could protect assets from the creditors (one could add predators) of a surviving spouse.
- By leaving assets to an abatement trust, the growth on the R3.5m is removed from the estate of the surviving spouse.
- The R7m rollover concession has in effect become a "use it or lose it" provision. This can be explained by way of the following example:
John and Elizabeth are married to each other but are the surviving spouses of marriages terminated by the deaths of their respective spouses. In each case, John and Elizabeth inherited the entire estate of their predeceased spouse.
The couple will now be entitled to a deduction of R7m each, together R14m.
If John bequeaths R7m to an abatement trust and the balance of his estate to Elizabeth, he will not pay any estate duty. In her estate, Mary would also qualify for her own R7m concession. Together they have benefited from a R14m concession.
If John does not use an abatement trust and leaves his entire estate to Elizabeth, he will not be liable for estate duty but Elizabeth will still only qualify for a R7m concession. Together they now only use R7m of the R14m available to them.
They will have squandered R1 400 000 in unnecessary estate duty (20% of R7m).
10. Don't get tripped up by tax avoidance schemes
It is important to remember that your will must reflect your wishes. It is fairly common to meet clients who have had wills drafted on the basis of some so-called clever estate duty avoidance scheme and who, sadly, have no idea of the exact nature of the bequests in their will.
It may be worth pointing out that very often the avoidance schemes were motivated on the basis of unsustainable assumptions, and while they may look good in theory they don’t work in practice.
Do ensure that you understand your will, and that the meaning of each clause is crystal clear to you. Read it, then re-read it and question the draftsperson until you are absolutely certain that your will is a true reflection of your specific requirements.
