Question

I recently went through an estate planning exercise with my financial adviser in which we looked at the capital gains tax, estate duty and executor fees that would be paid should I die soon. The one number that really stood out was the executor fees. Do you have any ideas on how I can reduce these?

Answer

The standard rate for executor fees is 3.5% plus VAT, which brings the fee payable to 4.025%. In other words, your estate would be paying R40,250 in executor fees for every R1-million in assets. So a unit trust investment of R3-million would attract R120,750 in executor fees.

There are several ways of reducing this figure.

Nominate beneficiaries

As soon as something is paid to your estate, it will attract executor fees. If there is no nominated beneficiary on your insurance or endowment policies, the proceeds will be paid to your estate. The solution is to nominate beneficiaries on your policies. This will save you executor fees and the proceeds will also be paid out a lot quicker.

If you work for a company with a pension fund, check that you have nominated beneficiaries of your group life cover. You may have been single when you started, but now you have a family with dependents. Nominate them as beneficiaries because the sums assured here can be quite large. Check with your HR department that you have nominated beneficiaries and they are the right ones.

Move unit trusts into structures

If you are using unit trusts as a vehicle for long-term savings, consider making those investments through an endowment structure. New-generation endowment policies are different to those old dodgy ones with massive upfront charges. The new-generation endowments have transparent and competitive cost structures. They allow you to invest in unit trusts through an endowment structure, which enables you to nominate a beneficiary. If there is a beneficiary, the executor does not get involved with the proceeds and you save on executor fees.

If you had R5-million invested in unit trusts, you could save more than R200,000 in executor fees by moving that investment into an endowment structure.

An endowment is only really going to work if you have an investment time horizon of at least five years. There are other advantages of going this route: tax on an endowment policy is 30% and capital gains tax is 12%, leaving scope for income tax arbitrage.

Move shares into endowments

I have come across several clients with substantial shareholdings. The executor fees here would be large. Some companies will allow you to hold these shares through an endowment structure. A skilled financial adviser can show you how to do this.

I have also been able to help clients move offshore shares into an endowment structure with a beneficiary nominated. Not only does this save them on executor fees, but it also makes the management of their estate a lot simpler and much more tax efficient.

 Negotiate lower fees

Finalising an estate is a lot more complicated than one realises. It can be done by a family member, but not knowing the procedures and what documents to lodge can drag out the process. It is recommended that you use someone experienced to do this.

Having said that, the amount of effort in sorting out a R1-million estate is very similar to doing an R5-million investment. It certainly does not warrant five times more fees in most cases. Hence many executor companies will offer discounts on larger estates.

So, in summary, go through your investments and see which of them could be better served by being in a structure like an endowment policy or a retirement annuity. Note the timeframes for those investments. Then go through every policy and ensure that you have a beneficiary nominated.

Once you have done this, get your financial adviser to draw up another dummy estate liquidity and distribution account, and check that there will be sufficient liquid assets to pay any executor fees and estate duties. You do not want to move all the assets out of your estate and find there is no cash to pay the duties, and then the executor is forced to sell assets.