By: Sankie Morata
In South Africa, about 20 million people, or half the working population, have active debt. Many may not realise that this debt will not disappear when they pass on but will be transferred to their next of kin.
I always tell our clients who think their debt will be gone when they pass away, ‘If you love your next of kin, settle your debts for their sake or be proactive with your estate planning’. This means setting up a plan that clearly outlines who will receive or inherit your assets after you pass away and it ensures that your dependents are provided for when you are no longer around. If you don’t do this, the Executor or person administering your estate may be forced to sell assets in your estate to settle the debt.
What kinds of debt could be inherited?
Debt on items like vehicle finance, personal loans, home loans, and business loans must be settled after death.
In addition to debt, other financial burdens that may affect heirs include:
- Executors fees for winding up the estate, which depend on its size.
- Capital gains tax (CGT) on properties, investments, and businesses to be transferred to heirs.
- Estate duty, which is applicable when assets exceed R3.5 million.
What does this mean for the deceased estate?
A deceased estate must have enough money or insurance cover to settle debts so that the surviving family won’t face insolvency. If there is not enough left to cover these costs, the Executor may have to sell any available assets. It’s a sad story that can often be avoided with proper estate planning and good financial advice.
Smart strategies to protect your family from your debts
Three strategies that could reduce the financial burden on your loved ones:
- Use life insurance to cover debts
- For credit-based items like vehicles and properties, optional Credit Life insurance can help to settle outstanding loans after your death.
Make clear credit arrangements
A credit or loan agreement is a legally binding contract between a borrower and a lender that documents all the terms of a loan. It will be helpful information to whoever inherits your estate and debts, especially if it contains a clause on what should happen to the loan upon the death of either party.
Document business loans and insurance
If you’re a business owner, clearly record any loans or agreements, so that your family is informed and able to repay these or be prepared to cash out any insurance policies that could cover these costs. This prevents the estate from getting sued by the lender and can help avoid a claim against the estate.
Also, consider taking out Key Person insurance or business insurance to help your company continue operating if a vital individual becomes incapacitated or passes away. These policies can cover essential costs, ensuring the business remains stable and survives despite the unexpected loss of a key contributor.
Document shares and assets that can be sold
Make sure your family has a list of the assets you own, any relevant passwords, and other critical information.
Leave a loan account for a trust to an heir
If a person has borrowed from the family trust, they need to try to reduce the loan account annually, for instance by donating money back to the trust. The loan account can also be left to an heir, allowing the heir to keep on reducing it instead of having to repay the trust in one go when the founder dies. It’s legal, and a smart way to avoid putting the estate in a difficult position when someone dies and there is still a lot of money owed to the trust.
Get a good team on your side
It is critical to appoint an estate planner who can help you structure the inheritance you want to leave to loved ones; a financial advisor who can help you save, invest and minimise your debt; and a fiduciary specialist who can help you draft your last will and assist your family in wrapping up your estate. If you design your estate plan to save costs, you increase your loved one’s inheritance instead of relinquishing your assets to the state.
These strategies are good tools for building a legacy in South Africa. It all starts with a will. Your will must be clear to deliver your intent and empower your beneficiaries to live with confidence. Last year, a survey on South Africans and wills, conducted by Sanlam Legacy, showed that 98% of respondents expressed a desire to leave a legacy, but only 39% had a will, indicating a clear disconnect that we must address. Now’s the time to get your affairs in order, draft a will, and have a plan to protect your family, now and after you are gone.
* Morata CFP is the chief executive of Sanlam Trust.
PERSONAL FINANCE