Make Sure You Have a Valid Will

-By Michelle le Roux

Last month we started delving into the legal aspects that we need to understand as part of the financial planning process.

We continue our journey this month by taking a high-level look at the Wills Act. Without venturing into the specific wording of bequests or clever structures, let’s start by asking a simple question: Is your will even valid?

The Basics

A will is defined in the Wills Act, 7 of 1953 as a “testamentary writing” and “codicils” – a typed or handwritten document and annexures, which sets out your wishes in the event of your death. How you compile your will is important. There are rules and if you don’t comply, your beneficiaries may end up fighting in court over your intentions, or in the worst case – your will gets declared invalid.

Sticking to the formalities doesn’t automatically mean that your will is valid. In addition, you must also comply with common law and the stipulations of your will must be practically enforceable. But first let’s make a giant stride to understand a few definitions and get the basics right:

 

Who can have a will?

Anybody older than the age of 16, who is mentally capable to understand his actions, can have a will. This person is called the “testator”.

 

Who can witness a will?

Anybody older than 14, who will be able to give evidence in court (if necessary) can witness a will. This is not simply about the age, but also about the level of maturity of the person who acts as the witness.

 

What is the difference between a legatee and an heir?

The word beneficiary is the collective name that refers to both legatees and heirs. A legatee is a beneficiary who inherits a specific asset or a sum of money (this is called a legacy), while an heir is a beneficiary who inherits the whole or part of the residue of the estate (i.e. after all legacies have received their inheritance).

 

Who can be a beneficiary?

Children and adults have equal rights to inherit, but it’s helpful to understand the position of children as beneficiaries in terms of the interpretation of a will:

  • Unborn children – The basic principle is that all persons who are alive, or who were conceived and later born alive, are able to inherit. If mom is expecting and dad dies before the baby is born but he named the baby either directly (“my unborn child”) or indirectly (“my children”) in his will, then the baby is a beneficiary if the baby is later born alive.
  • Children born out of wedlock – The extra-marital status of children born out of wedlock is irrelevant.
  • Adopted children – An adopted child is seen as if he was born from his adoptive parents and not his biological parents.

 

Who cannot be a beneficiary?

A person can become “unworthy” to be a beneficiary. This can happen in a number of ways, but here are a few common ones:

  • Roman-Dutch law gives us the principle of de bloedige hand neemt geen erf. Simply put: a person who murders another may not be his beneficiary (but this does not include acting in self-defense).
  • It is a criminal offense to steal, deliberately destroy, falsify or damage a will, and anybody guilty of such an act can’t benefit from the will.
  • A person who influences the testator to name him as a beneficiary will be disqualified.
  • A person who signed the will on behalf of the testator, and the witnesses of the will (including the spouses of such persons) cannot be beneficiaries in principle. But they may qualify to inherit if there are at least two other independent witnesses who signed the will, and who will not receive any benefits from the estate.

 

What happens if I am recently divorced, and I die before I made a new will?

Say you passed away within three months after getting divorced, and did not make a new will after the divorce, your ex will be disqualified as a beneficiary.  This regulation was put in place because there is the assumption that divorced spouses would not want to benefit each other once they are divorced. After three months this provision falls away, if you died in the fourth month after the divorce, your ex would inherit as per the pre-divorce will.

 

How should I sign my will?

There are a few formalities in this regard:

  • You must sign every page of the will and at the end of the document (or if you are physically unable to sign yourself, you are allowed to appoint someone else to sign on your behalf).
  • You (or an appointed person) must sign in the presence of two or more competent witnesses at the same time.
  • If you do not sign with a full signature, the “making of a mark” is acceptable, but this then needs to happen in the presence of a Commissioner of Oaths who your identity.

Interestingly, it is not a requirement that a will must be dated. But in practice this is always included, and is typically a sentence that reads somewhere along the lines of “Signed at (place) on this (day and date) in the presence of the undersigned witnesses….”

 

Who can be the executor of a will?

An executor is the person who has the responsibility to wind up your deceased estate, and to communicate with the Master’s office during that time. You will nominate an executor in your will, but this doesn’t necessarily mean that he/she will be appointed by the Master.

The nominated executor will have to be qualified (in terms of knowledge and experience) to deal with the administration aspects. He can’t be a minor or be mentally unsound. He (or his spouse) can’t have signed the will on the testator’s behalf, or prepared your will in his handwriting.

Persons living outside South Africa and unrehabilitated insolvents (a person who still has limited contractual capacity after having been declared insolvent by a competent court) may be considered as executors but it’s likely that the Master will insist that they provide security (and register a domicilium address in South Africa in the case of a non-resident).

What happens if my will is not signed correctly?

If your will is signed but does not comply with the formalities of the Wills Act, the court can still make it valid if it is satisfied that the document contains your wishes and that the assets are bequeathed according to your intentions.

Interpretation is key here, and debating this may incur considerable legal costs and can become a very drawn out process. Even if the outcome is favourable for the beneficiaries, it’s best to avoid this situation and make sure we cross our “t’s” and dot our “i’s”!

Of course there are also other scenarios where the will is declared invalid, or where you didn’t make a will, or your will can’t be found. Then what? Next month we look at this aspect to see how an estate is divided according to the provisions of the Intestate Succession Act.

5 basic points check on your will today

  1. Do you have your original will?
  2. Is the will signed and witnessed by two people who are not benefitting from the will?
  3. Who is named as Executor, and is he/she capable to handle the administration aspects of winding up an estate?
  4. Have you updated your will according your current circumstances?
  5. Did you take your marital regime into account when bequeathing your assets?

 

Contact us for a check up on your estate plan.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

 

The Three Biggest Lies by the Passive Industry

-By Sunél Veldtman & Thiart van der Merwe

 

Before we dive in – lets recap our definition of a passive investment strategy:

A Passive Investment is one that  merely tries to replicate a certain index as closely as possible over time. Because the constituents and construction methodology of most indices, like the ALSI Top 40 are made available, a simple strategy is for a portfolio to exactly replicate this.

Active investment management, on the other hand, is a style of investing where the portfolio manager aims to design a portfolio that will outperform the index. The selection of shares and the weight of the shares will therefore differ from the index in an attempt to produce a superior return.

We are impartial to both active and passive investments. We have no vested interest in either. We are simply committed to giving the best advice to our clients. For this reason, we are concerned by the propaganda of the growing passive industry as it’s creating pervasive ideologies that are hurting investors, and damaging their portfolios and financial futures.

The result: investors start taking on this hype as truths. There are three important untruths that people now believe that are simply that: not truth or lies. Here they are:

You don’t need an advisor

Very few investors have the time, knowledge or skill to invest their own money. To suggest that investors can merely go straight to a passive product provider, select the correct product for their needs and live happily ever after, is ignoring reality. Even when investors have the skill, they most often lack time.

Most investors do not know the difference between a Divi Index or a Swix Index. Even if they did, they may be unaware that by choosing the Top 40 Index Fund, they end up investing a quarter of their savings in one share. And most people do not know whether they should save in a retirement annuity or a unit trust fund; whether they should pay off their bond or buy a tax-free savings vehicle. Most people who retire from their retirement annuities, are not aware of all the options and tax consequences of their choices.

To suggest that the only value that advisors add is to select products, is misleading. Financial advisors and more specifically financial planners, help their clients to understand their needs, articulate those needs, do proper risk assessments and cash flow analysis, tax and estate planning. Then they help their clients to implement those plans cost-effectively and continue to monitor the progress towards their clients’ goals over the long-term. The research is clear, locally and abroad, that clients with financial plans are financially more secure and happier.

One of the most important jobs of an advisor is to help clients stick to their plans.  The research is also clear that most retail investors do not achieve the returns available in the market because they chop and change investments strategies – mostly on the basis of the most recent past performance. You only have to study the inflows into equity unit trust funds in South Africa to see this play out. Sadly, advisors are also at fault here, but recent research by Coronation suggests that it is much less prevalent among advisors than retail investors.

According to Coronation, we can compare the inflows into various asset classes compared to returns. What is evident is that after a year of good performance, a fund enjoys increased capital investment. Similarly, in a year after average or poor returns, investment is low or even negative. Following the poor returns from the local equity market in 2016 (3.6% growth),  there were basically no investments allocated to equity in 2017; this in a year where the All Share Index returned 21% growth.

Fees are low

Passive products available to retail investors in South Africa are still relatively expensive and not that much lower than actively managed funds. When comparing fees, it is important to compare like for like. The Total Investment Charge is a more accurate reflection of the all-in fee charged within a fund.  In some instances, we need to further add the platform charges, which could be as much as 0.60% if you look at the Satrix Investment Platform that is still active for some investors.

In addition, when comparing fees, passive product providers are sneaky. When looking at fact sheets of index funds, the management fee tends to be lower. When looking at the Minimum Disclosure Document for the Satrix Balanced Index Fund, the management fee is 0.40%. However, when taking all transaction costs into account, the Total Investment Charge is 0.96%. Then we have also come across passive product providers who have ‘advised’ clients that they could exchange our total financial planning package for one product at a mere 0.3% (not disclosing the actual underlying costs of a total 0.85% either) – and not quantifying the value of the planning advice that we provide the family with complicated financial affairs.

In a nutshell, make sure you are comparing fees for the relevant services. You cannot compare a package that includes advice and tax vehicles like endowments and offshore structures with a local equity passive fund.

Ask yourself these three questions when looking at fees:

  • Are the administration fees disclosed in the product I am looking at?
  • What is the Total Investment Charge (TIC) of this investment?
  • What is the advisor fee – and more importantly do I think I can manage my family’s financial decisions without one?

You will get the market return

When you choose a passive product, you are guaranteed to underperform the market by the fund charge plus the tracking error. Every passive product is designed to track an index. Although it involves less risk of underperformance than an actively managed fund, there is still risk in the mimicking of the index – it is called the tracking error. Over time, the comparison with the index will also show up the impact of fees. The Satrix Top 40 ETF has underperformed the index by 0.50% over a 5-year period.

Right now, it is easy to compare the JSE/FTSE All Share Index returns with active manager returns and conclude that active managers are not worth their fees. The comparison is flawed. It does not consider risk and it also does not take into account that most of the growth from that index has come from one share – Naspers. It will be a huge shock to retail investors when Naspers falters. Which it will. No company in the history of modern investments has continued to outperform other companies consistently over time. It is the law of diminishing returns.

Comparing the Satrix Top 40 to a number of actively managed funds over five years shows the following returns –  just to highlight that choosing an investment can’t be limited to a fee discussion:


Last year, we conducted an in-depth study comparing active and passive investments, read the article here.

Let’s not lose faith in the industry

There are those in the passive industry that have created emotive marketing campaigns that give the impression that most market participants are crooks and out to fleece investors. It is unhelpful for many reasons but mainly because its puts people off saving. We contend that it is better to save in a bad product than not at all. That’s what’s happening. Most ordinary people are misinformed and this kind of marketing conjures up fear.

Yes, there are still bad advisers and greedy financial services companies – but our savings industry is healthy and well regulated. Investors need to know that they can trust the industry.

Through years of experience with retired clients, we have witnessed that most ordinary people who retire well, are the ones who have saved (funny that), sometimes in bad products with lock-in clauses, but they have saved over long periods of time and have stuck to those products.

It’s about value for money, not the lowest fees

Yes, the fee chain can still contract, but there comes a point where it also needs to sustain a healthy industry which can comply with increasing regulation. Investors need to understand the difference between a cheap product bought directly from a passive product house, and a full service financial solution from a financial planner.

Some of these passive products are as bad as the bad active products – they are undiversified and backed by rudimentary asset allocation practices.

It is like every other product that you buy. You can buy the Rolls Royce or the Tata. Just make sure you get value for money and that it’s the right vehicle for you.

So next time you read an article by a passive product provider slating the industry, just take a step back. They are trying to fill you with fear to market their own products. Make sure you get value for money from your investment product or your financial adviser rather than throwing out the baby with the bath water.

 

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

Words Worth Reading

After a very successful Encore workshop, we feature more on retirement in Words Worth Reading.  This time it’s on Olderpreneurs: the new word for entrepreneurs who start their businesses later in life. Read the article here.

In an article from the MIT AgeLab at the Massachusetts Institute of Technology, they conclude: “Today’s retirement plans and engagement strategies were written for yesterday’s retirees”. The longevity economy now requires a different retirement narrative – one that includes financial security as well as a story that helps people navigate the new old age.”  Read the article here.

 

 

Words Worth Reading

This month, in Words Worth Reading, we include an article about the decision for early retirement from the New York Times.  Early retirement is not just about having enough money. It is about what you will do with your time. Read the article here.

We were so encouraged to discover ‘The New Act’ – a new section of the Financial Times. It illustrates the need for thinking about Encore – the second half of life. Read their introduction into this new venture.

We hope to see you all at this year’s Encore Workshop!

 

When to retire from your retirement fund

-By Sunél Veldtman

 

Your retirement and the retirement of your money are separate events. You do not need to retire from your retirement fund at the same time as your own retirement, and you can retire from your fund before you retire.

When can I retire from my funds?

Age 55 is the time from which you can retire from your retirement fund. Whether you have access to your money, depends on the type of retirement fund you contribute to. If that fund is a condition of your employment at the time, you may not retire from that fund until you leave that job. You may then be contributing to a pension or provident fund and you will need to continue to contribute until you retire, resign or are retrenched.

However, if you are contributing to a retirement annuity, you may retire from your annuity any time from 55. There is a caveat! If you are still contributing to an old style annuity, one that you signed to keep contributing to for a fixed period, you may be liable for penalties and fees – and you might not be able to get out of it until the maturity date of your annuity.

Of course, if you are contributing to a more modern, flexible annuity, you can stop or change your contributions at any time. You can take a contribution holiday and start again when you need or want to. (As an aside, you can possibly change from those old annuities, sometimes without cost – to a more flexible, cost effective annuity. Talk to Foundation if you would like an analysis of your annuities.)

If you have a preservation fund – as a result of previous contributions to an employers’ fund – you may also retire from these funds at any time after 55 regardless of your employment.

What are your choices on retirement?

On retirement, you can draw a third of your pension, retirement annuity or pension preservation fund in cash. You can draw your entire provident fund in cash (although the government wants to change this). The first R500 0000 of your lump sum withdrawal, is tax-free. Thereafter, the Receiver will take their share according to a tax table. See below.

With the rest of your retirement funds, you must buy an annuity that should ideally give you a regular income stream for the rest of your life.

Why would you delay retiring from your retirement fund?

It is tempting to get your hands on a large lump sum at 55. Sometimes it is necessary to fund plans for another career or a new business. But, it’s important to mention: It is equally tempting for those financial advisers who earn (a fat) commission on selling products to try and convince you to buy an annuity after turning 55.

If you do not need the money, it is rarely advisable to retire from your retirement funds at an early age. The reason is simple: the power of compounding. The longer you can leave the funds to grow inside a retirement fund, tax free, the better. Let’s look at this graph as an example:

 

When you retire from your retirement funds, taxes will devour a large part of your savings. Since it is compulsory to buy a life annuity from which you will receive a taxable income or living annuity – you must draw at least 2.5% every year and you will pay tax on the income withdrawals.

In the graph above, we illustrate the difference in the capital value of a retirement fund between Person A who retires at age 55 and withdraws 2.5% per year but re-invests the funds (so the person is still working and living off a salary), and Person B who retires at age 65 and starts withdrawing then.

Of course, the tax on your lump sum will also diminish you savings immediately.

When does it make sense to retire early from retirement funds?

There are times when it makes sense to retire earlier from a retirement fund and it relates to accessing the lump sum. When your retirement assets are a large part of your assets, access to liquidity is sometimes a challenge. For example, if a family wants to increase their direct offshore exposure to protect their assets against political risk, they may choose to retire early from their retirement funds providing they can afford to.

When do I need to retire from my retirement funds?

There is no longer a compulsory retirement age. You can delay retirement from your retirement funds indefinately. That is, if you can afford to.

As of 1 March 2018, a person will be able to transfer a pension or provident fund to a retirement annuity once the member has reached retirement age (The Taxation Laws Amendment Act, 2017). There will be no tax consequence. The full value of the retirement interest will need to be transferred and can’t be staggered. Should you transfer the provident fund to a retirement annuity you will lose the liquidity benefit of withdrawing 100%.

It is likely that you will also be allowed to transfer your pension or provident fund to a preservation fund at retirement (waiting for formal announcement).

This makes sense if you have other income sources or accept another job after you have retired from your employer’s pension or provident fund.

Can I continue to contribute to a retirement annuity after I have retired?

You can now contribute to a retirement annuity after your retirement even if you no longer earn a salary. It makes sense if you earn more income than you need. You can deduct your contributions from your taxable income up to the 27.5% of your taxable income to a maximum of R350 000 per year.

Deciding when and how to retire from your retirement products can be complicated. It should not necessarily determine when and how you retire though. At Foundation, we help our clients through this minefield. We are also not commission driven – nor do we make money from advising you to buy a new product. This puts us in a place where we can help you through the process by offering advice that is in your best interests. We can show you the impact of your decisions to retire earlier or later through thorough analysis. You can therefore make better decisions for your future.

 

Foundation Family Wealth is an Authorised Financial Services Provider.

 

When is a spouse a legal spouse?

-By Michelle le Roux

 

The fiduciary world is fascinating.  The more you learn, the more you realise how little you know.

In the last year we’ve had a firm objective at Foundation to ensure that our clients are in contact with our estate planning specialists and have valid, updated wills. As we studied each one we came across some complicated wording (and technical bequests!), but we are fortunate that our law is very clear about the basic principles.

This month I’m going back to some of these basics and recapping what we know about the different types of marriages and marital regimes in our country. It’s first and foremost important to understand the legal definition of a spouse, because it has various legal implications – in particular on an individual’s estate.

What do you need to know about your own marriage?

Before we take a closer look at the legalities, are you able to answer “yes” to the following questions?

  • Do you know which Act (and the terms) you were married under?
  • Do you know which matrimonial regime or matrimonial property system you were married in?
  • If you are married Out of Community of Property, is the accrual system included and how are you keeping track of accruals?
  • Does your will take your marital regime into account?
  • If you have a long-term life partner, do you have a co-habitation agreement?

These questions are very important and impact the way we approach your financial planning as well as estate planning.

The different types of marriages

Before the Recognition of Customary Marriages Act came into effect in 1998, the only legal type of marriage in South Africa was one that was concluded in terms of the Marriage Act. Today (luckily) our legislation provides other options for more diverse needs.

A union between people is recognised as a marriage in South Africa if it is concluded in terms of the following Acts:

  • Marriage Act 25 of 1961. This is the old-fashioned way; simply put it’s a marriage between a man and woman.
  • Recognition of Customary Marriages Act 120 of 1998. This applies to marriages concluded in terms of customary law, and it is applicable to customary marriages that occurred both before and after 1998. It includes monogamous and polygamous marriages.
  • Civil Union Act 17 of 2006. This is similar to the Marriage Act in terms of a monogamous union. While it usually applies to a union of persons of the same sex, individuals of opposite sexes can also conclude a marriage in terms on this Act.
  • Traditional Muslim and Hindu marriages are not recognised in South Africa as a legal marriage, regardless of whether it is monogamous or polygamous. The Muslim Marriages Bill was drafted in 2011 but has not been enacted and as a consequence, Muslim spouses remain largely without legal recourse. The solution for these individuals would be to be married in terms of one of the above Acts, but this is usually not possible because of religious objections, or simply because of its polygamous nature.
  • Domestic partnerships, or long-term life partnerships, are also not considered as a marriage in the eyes of the law.

It is advisable that a co-habitation agreement is put in place for both a Muslim marriage and/or domestic partnership, stating the financial status for each partner, division of living expenses and property (owned jointly or separately), and what the couples wishes are in the event of death.

Marital regimes

The Matrimonial Property Act determines how parties in a legal marriage maintain control over their property and ultimately, their estates.

  • Community of Property (COP) – This is the default regime and applies unless an ante-nuptial contract is entered into before the start of the marriage. Each spouse owns half the undivided share of the communal estate, and consequently half the debt.
  • Out of Community of Property – Spouses sign an ante-nuptial agreement before the marriage. Each spouse owns and accumulates their own estate and is not entitled to the estate of the other.
  • Out of Community of Property (including the accrual system) – Spouses also sign an ante-nuptial agreement before the start of the marriage. In this case community of property is excluded so that each spouse keeps their pre-wedding assets, but the communal estate after the marriage is divided equally. Each spouse is also entitled to the growth of the assets excluded from the communal estate.

Which regime applies to which marriage type?

Marriages in terms of Marriage Act and Civil Union Act – Any one of the three different regimes may apply, but will be COP by default unless an ante-nuptial agreement is entered into beforehand.

Marriages in terms of Recognition of Customary Marriages Act – The parties do not have an option in terms of the applicable regime because the date of the marriage will determine the regime. A monogamous customary marriage will be COP regardless of when marriage was entered into. Thanks to a groundbreaking case in the Constitutional Court in November 2000, a polygamous customary marriage will be COP after Nov 2000, but Out of Community of Property before that date.

A note on the Maintenance of Surviving Spouses Act

Besides the Acts discussed above which set out marriage types and regimes, our law books also have a very important piece of weaponry in their arsenal called The Maintenance of Surviving Spouses Act.

This Act was enacted in 1990 to give a spouse a legal leg to stand on if he/she is negatively affected or disinherited by the wishes of the testator, or in the case where the testator dies intestate and there is no will.

It means that a surviving spouse may have a financial claim against a deceased estate in certain cases, particularly where the surviving spouse is unable to provide for his/her own maintenance needs.

The term “spouse” is used throughout the Act – so what about Muslim marriages and long term domestic partnerships? While this Act automatically applies to the legal marriage types discussed above, the good news is that in 2009 the Constitutional Court also made it applicable to all Muslim marriages as well as persons in a long-term domestic partnership. These individuals are by pure legal definition not “spouses”, but are able to enjoy some protection under this Act.

Of course, what constitutes a valid will, and how marital assets are divided on divorce or death are separate subjects entirely; we will have a look at these in the near future. In the meantime, please read through your will and make sure that is updated with your latest wishes. Get in touch with us if you need help in making amendments and we will put you in touch with our estate planning specialists.

 

Foundation Family Wealth is an Authorised Financial Services Provider.