Planning will ease finances for your loved ones upon your death

Question

I recently watched a television programme about how long it is taking the master’s office to finalise estates. I would like to restructure my affairs so that it will be easy for my wife to inherit should I die.

We are both in our late seventies. I have about R4-million in a UK bank account as well as two properties worth a combined R6-million. They give us a monthly income of R18,000 after costs. We are in the process of selling them, as we no longer want to manage property.

Answer

I do not have all the information about your finances, so it is important that you speak to an adviser before making any big decisions. I will, however, run through a few ideas that you may like to consider.

Bank deposit

Interest rates overseas are improving, and this can result in you having to pay income tax on the interest. I am moving the proceeds of many of my clients’ offshore bank accounts into bank-like investments in a portfolio. These have a similar risk profile to a bank deposit, but the advantage lies in the growth in the fund being rolled up.

This means that you do not have to pay interest on an annual basis. You will only pay capital gains tax (CGT) when you liquidate the investment.

In your case, as you are looking to make inheritance easy, I would split the investment in two and invest it in offshore endowments in your name and your wife’s name.

The transfer of the asset to your wife would take weeks rather than years should you die. There will also be no executor fees payable, as your wife would be the nominated beneficiary.

Rental properties

I regularly come across retired people who are finding the hassles of dealing with rental properties and tenants a tad too stressful.

Income-generating investment

Once you sell the properties, I would recommend that you split the investment into two and invest half in your name and the other half in your wife’s name.

This will ensure that, when one of you dies, the surviving spouse will have funds to live on while the estate is being finalised.

If you invest the proceeds, you could draw down an income of 5% without putting the capital in any danger. A 5% drawdown on a R6-million investment would give you an income of R25,000 a month.

The advantage of this approach is that the income you receive from the investment would be taxed as CGT instead of income. This would be 40% of your income tax rate.

For example, if your income tax rate is 30%, you would pay CGT at a rate of 12%. Your rental income, on the other hand, would be taxed at your marginal tax rate.

Guaranteed life annuity

Another option to consider is to use the proceeds of the house sale to give you a monthly income through a 100% guaranteed joint life annuity.

Here your R6-million would give you a monthly income of about R50,000. This amount would increase by 5% a year until you and your wife die. It is a great way to increase your monthly income, but it does have the downside that once you and your wife die, there is no inheritance for the children, if you have any.

On the other hand, you and your wife will be assured of a great income with no hassles when one of you dies.

Hybrid

Another option would be a combination of the two. You could use R3-million of the proceeds of the house sale to buy a guaranteed joint life annuity. This will give you an income of about R24,000 a month.

The balance of the proceeds can be split into two investments in your and your wife’s names, with each of you nominating the other as beneficiary.

This will ensure that the proceeds pass directly to the surviving spouse.

As you can see, a bit of planning can make a massive difference to making it easy for your loved ones to deal with the financial implications of your death.