One plan, not two: Why estate planning cannot stand alone

Many people speak about a financial plan and an estate plan as though they are separate pieces of work: the financial plan deals with investments, retirement, tax and risk cover during your lifetime, while the estate plan consists of a will and beneficiary nominations that become relevant after death.

An advisor may model retirement income while an attorney drafts a will, but unless the processes are coordinated, each may be working with only half the picture.

A financial plan that ends at death is incomplete, while an estate plan that has not been tested against the client’s assets, liabilities, and family responsibilities may be legally valid but financially unworkable.

Estate planning begins with the financial facts

Before deciding who should inherit, it is necessary to understand what exists, how it is owned and what obligations the estate will need to meet.

Investments, retirement funds, policies, property, business interests and trusts must be considered together with debt, maintenance obligations, tax exposure and the matrimonial property regime because they already form part of the client’s financial position.

The same applies to financial dependency. If a spouse, minor child, elderly parent or disabled family member relies on the client’s income, the estate plan must do more than identify that person as a beneficiary – it must establish how much capital will be required, where it will come from and how it should be managed.

This calculation belongs within the financial-planning process because it requires cash-flow modelling and an understanding of the resources already available. Only then can life cover or other assets be used deliberately to close the gap.

Read: When good financial advice starts to age

Your will controls only part of the outcome

It’s important to keep in mind that a will does not govern every asset that you own. While assets held personally will generally devolve through the estate, note that trust assets are administered under the trust deed, while life policy and living annuity proceeds may be paid according to beneficiary nominations.

On the other hand, retirement fund death benefits governed by Section 37C of the Pension Funds Act are distributed by the fund trustees after the deceased’s financial dependants and nominees have been identified.

As such, a carefully drafted will can still fail to produce the intended result if the broader portfolio points elsewhere. An ex-spouse may remain nominated on a policy, a testamentary trust may be created for minor children, but little may flow into it, or the majority of the deceased’s wealth may sit in structures the executor cannot distribute under the will.

An advisor may see these inconsistencies, but identifying them is only useful if the documents and nominations are then aligned.

Liquidity connects risk planning to estate planning

Understanding the estate’s liquidity is important because an estate may appear solvent on paper and still be unable to meet its obligations without selling assets.

Debt, tax, administration costs and maintenance claims create a need for cash, while dependants may require financial support in the immediate aftermath.

Where most wealth is tied up in a home, business or illiquid investment, the executor may have little choice but to realise an asset the family expected (or hoped) to retain.

This is where risk planning and estate planning become inseparable. Life cover can settle debt, create liquidity or support dependants, but the ownership of the policy and identity of the beneficiary determine where the proceeds are paid and what they can achieve.

For instance, proceeds paid directly to a beneficiary may support that person but will not necessarily provide cash to the estate, while direct payment does not automatically exclude the policy from the estate-duty calculation.

Tax efficiency must be considered across both plans

Investment decisions can materially alter the tax and liquidity position at death. Subject to exclusions and spousal roll-over relief, death can result in assets being treated as disposed of for capital gains tax purposes, while estate duty is calculated after taking account of property, deemed property, allowable deductions and the Section 4A abatement.

Overlooking these consequences may leave the estate with a liability for which no cash has been provided.

Having said that, tax should not be considered in isolation from the family outcome. Leaving everything to a surviving spouse may secure tax relief on the death of the first-dying spouse, but it may also concentrate all decision-making and future exposure in one estate.

Conversely, moving assets into a trust or making donations purely to reduce estate duty can create tax and administration costs together with a loss of personal control over the assets.

An effective plan therefore weighs tax efficiency against affordability, family dynamics and the client’s need for flexibility while alive.

The plan must work for the people who inherit

It’s important to remember that estate planning is concerned with people, not just assets. A minor child cannot manage an inheritance in the same manner as an adult, a disabled beneficiary may require lifelong administration, and an heir who lacks financial experience may be poorly equipped to receive a large amount outright.

Testamentary trusts, beneficiary funds and carefully drafted provisions can provide protection, but the appropriate structure depends on the beneficiary’s needs and the assets available to fund it.

The same applies in blended families, where providing for a surviving spouse may need to be balanced against preserving capital for children from an earlier relationship.

A right of occupation, usufruct, trust or life policy may form part of the solution, but it’s important to understand how each affects cash flow, ownership, tax and control. The plan is required to support real people, not merely distribute assets according to a document.

Read: Retirement planning is not a tax strategy – it is a life strategy

Your financial advisor should connect the pieces

Where an advisor prepares a comprehensive financial plan, an estate-planning component should arise naturally.

This does not mean that the advisor should draft legal documents or work outside their competence, but the advisor should identify estate-planning risks, quantify liquidity and dependency needs, review ownership and beneficiary nominations, and coordinate with the client’s attorney, tax practitioner and fiduciary specialists.

A financial plan should explain how your resources will support your life and protect those who depend on you, while an estate plan should ensure that the same purpose continues when you can no longer direct the outcome yourself.

They are not two independent documents, but one coordinated strategy viewed across different time horizons – and the true test is not only whether it works while you are alive, but whether it continues to work when your family needs it most.

South Africa’s first female AG on accountability, public spending and the youth unemployment crisis.