Question

My husband is 82 and is not in the best of health. We are concerned that he may be showing early signs of dementia and we will be seeing a specialist next month.  We currently live off the proceeds of his investments which consist of local and offshore unit trusts and shares.  What should we do to ensure that I continue to receive an income no matter what happens?

Answer

It is important that you restructure your assets now as it will become a lot more difficult to do so, should your husband be declared to be mentally incompetent or pass away. 

I would recommend that you speak to a financial professional who can help you set up the right structures.  Here are some of the options that you should consider.

Local assets

As you are likely to be using your local investments to provide you with an income for your day-to-day expenses, it is important that they be restructured so that the decision making required by your husband is removed. 

You can consider doing the following:

• Have your husband donate some of the investments to you so that you can manage them in your name. Donations between spouses will not trigger donations tax.

• Consider buying voluntary joint life annuities. These will give you and your husband a guaranteed income for the rest of your lives.  This can be a great way to secure an income that does not require a level of expertise in terms of deciding which investments to liquidate each month.

• If you have any investments with a time frame of more than five years, then you could move them into an endowment or a sinking fund. The advantage here is that should one of you pass away, the inheritance process is quick and the surviving spouse should have access to the capital within a month rather than the years it is currently taking for estates to be wound up.

Offshore assets

The offshore assets need to be urgently dealt with.  Should your husband pass away, these would need to be transferred into your name.  This can be an extremely time consuming and costly exercise as you would need to work through executors and offshore lawyers.  Depending on where these investments are held, situs tax of 40% could be payable.  You could have a situation where you only receive half of the proceeds after a lengthy delay while the estate is wound up.

I would recommend that these investments be split between you and your husband to ensure that you have easy access to some of the funds, should there be a problem. 

You should consider moving these into an offshore endowment or sinking fund structure.  I would recommend using a sinking fund rather than an endowment because if your husband is declared to be mentally compromised then you may need to set up a special trust to take care of his needs should you predecease him.  A special trust can hold the assets of a sinking fund but not those of an endowment.

The advantage of having the assets in a structure like a sinking fund is that should husband pass away, they will immediately pass across to you as the nominated beneficiary rather than having to go through the long and expensive process of being dealt with as part of an offshore estate.  It will also not trigger situs tax as the assets will be deemed to be part of your South African estate.  This should save you a significant amount of money

Warnings

You need to be aware of the following:

• Capital gains tax will be triggered when you change the ownership of the assets from your husband to yourself or from your husband to the sinking fund. If it is any consolation, capital gains tax would be triggered should either of you pass away so you can see this as paying the tax in instalments.

• Selling the offshore unit trusts and shares can be a time consuming and cumbersome process. However, it will be significantly easier to do now rather than later when there are issues with your husband’s mental capacity or should he be deceased.

• If you make use of a voluntary annuity to provide you and your husband with the guaranteed income for the rest of your lives, remember that the capital used for this annuity will not be available for your children to inherit

• You should get a medical professional to confirm that your husband is mentally competent when signing any of the documents to effect these changes. You do not want these decisions questioned in years to come.

By restructuring the assets now, you should be in a much better position to handle the challenges later.