Financial Planning for the Modern Woman- Part 2

Liberty Legal Focus

There is an increasing worldwide trend for partners in a relationship not to get married, but to simply live together or "co- habit" has its own consequences as far as taxes and financial implications are concerned.

Tax implications of a "common law union"
In South African law there is no such thing as "common law spouses" even though the term is brandished aroud so often that factually it may seem to exist. In terms of our tax legislation, and specifically the Taxation Laws Amendment Act 5 of 2001, the definition of spouse was extended to include , among others, "persons who are in a same- sex or heterosexual union with which the Commissioner is satisfied is intended to be permanent". The impact of this legislation is that people who fall within this definition are for purposes of estate duty, capital gains tax and donations tax treated as spouses- the section 4(q) estate duty deduction, CGT roll over's and tax free donations will be allowed between these parties. This is obviously very useful when it comes to personal financial planning and in particular estate planning. While the legislation does state that this kind of union, unless there is proof to the contrary, will be treated as excluding community of property, it does not go very far in terms of spelling ot the parties' rights and obligations in terms of their proprietary interests.

What risks should parties who co- habit instead of marrying be aware of?

A couple of pertinent questions may answer this:

• If the relationship should end because the parties fall out, what will happen to the property acquired during the course of the relationship?
• Does provision for retirement include both partners or will both be reliant on one partners pension/ retirement fund?
• Will either parties need or be entitled to maintenance should the relationship terminate?
• What is the intention of the parties if either dies, in terms of the other inheriting?
• Is there sufficient provision for the surviving partner and dependants?

Intestate Succession Act

What happens to the assets of one of the parties on death in the absence of a valid will bequeathing those assets to the survivor? The Intestate Succession Act 81 of 1987 specifically deals only with parties married in terms of the Matrimonial Property Act 88 of 1984 and as such precludes co- habiting life partners. The constitutional court has recently made several  rulings to the effect that same sex partners and partners married in terms of Muslim or Hindu tenets should also be protected in terms of the Intestate Succession Act, but no rulings has been made regarding heterosexual life partners. Therefore,  the survivor would have no legal claim against the estate of the deceased.
It is thus critical that life partners make certain that they have current and up to date wills in place reflecting their intentions and wishes.

Maintenance of Surviving Spouses Act

Likewise, the Maintenance of Surviving Spouses Act, 27 of 1990 only caters for "spouses" who are married in terms of the Matrimonial Property Act. The life partner who may have been co - habiting with the deceased before his/ her death and been completely dependant on this person for maintenance would have no claim whatsoever against his/ her estate. (Note that, in terms of the Pension Funds Act 24 of 1956, the person would qualify as a factual dependant and would be able to lodge a claim against those benefits, if any).
A financial needs analysis must be conducted in order to ascertain what the financial implications of the death of one of the life partners would be on the survivor and if there is a need, this need must be catered for.

What happens if the life partners decide to go their seperate ways and split up?

In 2008 the Domestic Partnership Bill was published which sought to provide some clarity and direction on these matters. Basically it distinguished between registered domestic partnerships and unregistered domestic partnerships. In terms of the Bill, parties to a registered domestic partnership would automatically be entitled to a claim in terms of both the Intestate Succession Act and the Maintenance of Surviving Spouses Act, while those in an unregistered domestic partnership would need to go to court for the relief sought. This Bill also clearly stipulated that such relationships would operate as if they were out of community of property, and so would automatically include the accrual system. On termination of the relationship for whatever reason, the parties would get to share in the growth of each other's estates from inception of the partnership. This Bill has not been taken any further and as such cannot be relied upon by parties cohabiting to protect their rights or interests.
How then do life partners protect themselves and regulate their affairs, other than by having a valid will? What happens practically when the relationship ends?

Universal partnership

One of the parties could allege that what is called a universal partnership exists between them. Basically, what is being said is that in terms of the law of contract, an agreement has been entered into between the parties in which they are to share their assets equally. All the terms necessary to prove a valid contract of partnership would need to be proved:

• That the partnership was entered into for the benefit of both parties;
• That the purpose of the partnership was to generate a profit;
• That both parties made a contribution to the partnership- financial or otherwise, and
• That the contract is legitimate.

If successfully proven that all the assets acquired after the partnership was formed will be jointly owned by the parties in undivided shares, and they will be jointly and severally liable for all debts as well as sharing in growth. However, the parties will be prevented from claiming maintenance from each other on dissolution of the relationship.

It is not necessarily easy to prove that a universal partnership exists, for example you will need to show under the "benefit for both parties" that both parties were actually better off together, than they were seperately. Invariably the parties will have to consult attorneys and may even have to go to court. This costs a lot of money, and those people who lack the financial resources to be able to afford legal fees may end up with nothing at all.

The Alternative: A Domestic Partnership Agreement

All parties co- habiting should take the same view as people in a business partnership with each other. They should enter into a legal agreement to regulate their proprietary affairs so that should the partnership terminate, there will be binding guidelines in place to determine how the property will be split up.
The best time to enter into this agreement is when both parties are on good terms with each other and have a long term view on the relationship. It is too late if you wait until one of the parties whishes to go his or her own way. A domestic partnership agreement deals with life partnerships and is similar to entering into an antenuptial contract. It will detail each party's rights and obligations, for example:

• Their respective financial obligations to the joint home;
• Their rights and obligations towards each other;
• Rights and obligations regarding jointly owned property, including the division of jointly owned property.

Generally on dissolution of the partnership, the parties will be entitled to retain the assets they own in their individual capacities and to share in the assets jointly owned or specifically identified in the Domestic Partnership Agreement.

Careful thought and consideration needs to be given when doing financial planning for life partners, especially when it comes to protecting their wealth in the event of death or termination of that partnership.

Financial Planning for the Modern Woman

Michelle Human, Legal Marketing Specialist

Can the modern woman really have it all? Today, women have more oppertunities, choices and challenges than ever before. Women need to take control of their financial planning to make sure that they own their lives, especially in the event of a life- changing situation. Here are some things to consider when it comes to taking charge of your financial freedom.

Look after yourself first
A woman needs to have a financial plan that caters for her own needs.
If she has children or is thinking about starting a family, her retirement plan must take into account a possible break in employment, even if only for a short time, while she is on maternity leave.
If it takes a dual income to run a family now, then a dual income will also be required at retirement to maintain the standard of living.

Financial protection in times of crisis
According to the CANSA Association, 1 in 29 women is diagnosed with breast cancer, every year. The effects of such a diagnosis can be devastating, both emotionally and financially.
Making sure that you have cover in place that will pay out in an event of such a diagnosis will at least give you the peace of mind that your financial wellbeing is taken care of. Comprehensive critical illness cover will make sure that funds are available to protect your family and their lifestyle. Consider the impact that this type of disease could have on your lifestyle:

•  Who would take care of your children? Whould you need an au pair to fetch them from school and other activities, supervise homework and dinnertime?
• Would you need someone to take care of household chores or drive you to treatments and doctor's appointments?
• Make sure that you can illiminate all other worries and focus on getting the best treatment possible.

For richer or poorer, in sickness or in health
The last thing any blushing bride wants to consider is the fact that her marriage may come to an abrupt end, either as a result of divorce or death. Making sure that you understand the law relating to your marriage could save you heartache in years to come.

The three marital regimes provided for in terms of the Matrimonial Property Act:

• Community of Property- the parties to the marriage share all profits and losses and are seen to have one undivided estate. Thus everything is shared equally.
• Ante- nuptial- contract (ANC)- this automatically includes the accrual system and is a community of profit, but not a community of loss, which comes into effect when the marriage ends. This is probably the most popular marriage regime of modern times. Assets required before the marriage may be exluded, but any growth in assets acquired during the marriage is shared equally when the marriage comes to an end.
• Ante- nuptial contract excuding accrual- the accrual system is expressly excluded and the parties have completely seperate estates. This is a marital regime often used where parties have already acquired significant wealth prior to their marriage.

Time out of the work force
When a woman starts a family she may choose to leave formal employment to be a full- time mom or work reduced hours with a flexible schedule. Here are some things to consider when you have children:

• Are your existing retirement benefits transferred into a Preservation Fund or Retirement Annuity to create a nest egg for the future?
• Are you accessing this amount now to reduce your costs and make your decision to stay at home more viable?
• Does the reduced income in the household allow you to continue with some form of retirement savings?

Financial freedom for your retirement years
Generally, women live approximately seven years longer than men. A women of 65 will need approximately 15% more than a man of the same age to provide the same pesnsion for the rest of her life, so women really need to put careful thought into their retirement plans.

Leaving a legacy
All too often women underestimate the need for a valid will as part of a comprehensive financial plan. It is not as simple as leaving all your assets to your spouse or significant other.

A will gives you the oppertunity to provide a guardian for your child in the event of both parents passing away. You may wish to provide for your children using a testamentary trust. This allows you to choose the trustees who will manage the funds for your children and give certain instructions regarding distribution of income and capital. Consider that your surviving spouse may remarry or have more children. Without a will, there are no guarentees that your children will receive the legacy you intended for them.

Going through the process of drafting your will also allows you to consider the impact of the estate duties, income tax and expenses that can easily erode the inheritance you thought you were leaving.

Life cover is an affordable way of ensuring that cash is readily available when your dependants need it most.

So where do you start saving?

The golden rule of saving is to "start with a plan".
To draw up a plan, you need to know what your end goal is and what you need in money terms to get you there. The following steps can help you to draw up your plan and stick to it!

1. What are your savings goal? Everyone needs a reason/s to save, e.g. to achieve retirement savings of R1 million, to be debt- free (no home or car loans) by age 40, etc.
2. How much money do you need to reach a goal?This will help you determine what you shoul be saving or investing every month.
3. Draw up a realistic monthly budget. This is one of the most effective tools to see where your money is going and what disposable income is available at the end of the month. A budget is simply adding up all your monthly expenses (rent, bond, and car repayments, insurnace, retirement fund contributions- including AVC's- electricity, etc) and subtracting it from your nett monthly income. Any money that is left over is called disposable income.
4. What can I do with my spare cash? Your disposable income should not be used to generate more expenses, but to pay off any debts or, if you are debt- free, to invest towards meeting your goals. To be financially stable, you need to prioritise your needs and wants at each stage of your life. Pay off accounts or credit cards with the highest interest rate first. Returns on your investments are unlikely to be higher than the interest rates on these cards. Then pay off your debts, e.g. home loan, car etc. as quickly as possible. A debt management plan can help you to get rid of your debt.
5. When do I start investing? The golden rule of investing is not to invest if you have debt. With some emergency cash stashed away, a debt- reduction plan in place and a secure insurance safety- net, you are ready to consider investing.
6. Getting help. Please speak to a financial advisor.
7. Monitor your bidget, needs and savings to ensure that you are on track with your financial plan, that your needs have not changed and to see how your savings are growing.

Source: Retire Right- November 2002

Keep your medical scheme for tax reasons says Resolution

14 May 2010
Resolution Health Medical Scheme

Medical aid costs and general medical expenses are fairly extensively tax deductible and hard pressed consumers should not act too hastily when it comes to cancelling or downgrading their medical aid cover, warns Resolution Health Medical Scheme.

Principal Officer Mark Arnold argues strongly that medical aid cover is not merely a nice to have and that, while cancelling or reducing that cover may bring temporary relief to household budget, it's in fact "false economy" that exposes you to potentially huge medical expense risk.

"Our basic message is retain your medical aid cover if it's at all financially feasible to do so," he says.

"While this obviously affects cash flow in the short term, a large proportion of medical expenses are deductible in a given tax year and it's obviously far preferable to remain covered for medical costs until those deductions begin to filter through."

"The tax benefit for medical aid contributions and medical expenditure are straightforward and can easily be explained " he points out.

The tax free allowance granted by the Receiver toward medical aid contributions during a given tax year, now amounts to R670 per month for the member and the first dependant and R410 per month for every other dependant.

"This works out at a substantial R2160 deduction pm (R25 920 pa) for a family of four, applicable after Minister Pravin Gordhan announced some welcome relief on the tax front for medical contributions in his budget speech."

In addition to that, the Receiver allows deducted against tax, your contribution that exceeds this total, together with the unclaimed portion of your general expenses (the amount not paid by your medical aid) where the total of those amounts exceeds 7,5% of your taxable earnings.

Also tax payers over the age of 65 enjoy a full deduction for qualifying medical aid contributions and expenses while tax payers under 65 may claim all qualifying medical expenses where the taxpayer or the taxpayer's spouse or child is disabled. So taken as a whole, these deductions and potential deductions can be substantial.

"It should be borne in mind however that any contribution made by the employer on behalf of the employee toward his medical aid contribution, either by way of a subsidy or a salary sacrifice is regarded as income in the hands of the employee and this has to be taken into account in your tax calculations."

The exception to the rule is where a company subsidises low income staff medical cover in which case that contribution is still either 100% tax deductible for the employee, resulting in a "zero effect", tax wise for the employee. Other tax free exceptions apply where contributions are made by a company on behalf of pensioners, or dependants of deceased pensioners.

"The fundamental fact is that medical expenses for individuals are already substantially tax deductible and maintaining your medical aid membership is crucially important against the background of rising medical costs and the questionable alternative of being reliant upon the State health system."

RA Solution

Source: Discovery Life

This is the start of a series of articles showing how flexible RAs have become since the rule changes last year and how they should be an integral part of planning for a client.


RAs are no longer just a tool to reduce a client’s taxable income, as was the case in the past.

Background

Since 1 January 2009 all payouts from RAs on death are free of estate duty

Subsequent to all the rule changes on RAs, on death, the full cash proceeds of the policy can be paid to dependants if they so wish

In terms of the Second Schedule to the Income Tax Act, any taxpayer contributions to a RA which did not “rank for deduction against the taxpayer’s income in terms of section 11 (k) or (n)of the Act” will pay out tax-free in addition to the R300 000 allowed. Section 11 (n) of the Act allows a deduction up to a maximum of 15% of non-retirement funding, taxable income. (The section has been paraphrased.)

Scenario

Client aged 84 has R3 million to invest. He does not need the money, but wants to invest it for his family. He has an estate duty problem.

Solution

The client invests the R3 million in a single premium RA. With this simple investment, the client has achieved five benefits:

The R3 million has been removed from the client’s estate, and will be free of estate duty when it pays out. This equates to a saving of R600 000, without taking growth of the investment into account

The investment will be in the untaxed portfolio in the insurers hands

When the client dies, his dependents can draw the full proceeds of the policy in cash if they so choose. This makes it a fully liquid investment for them

The policy proceeds will pay directly to the dependants on death and not be subject to executor’s fees in the deceased estate. Assuming no growth, and the normal executor’s fee at 3,99%, this equates to a saving of R119 700

Finally, the R3 million paid into the RA would have been well in excess of the allowable deductible amount (see above). It would be safe to assume that it would not have been tax deductible going into the RA. This would mean that it would come out tax-free on top of the R300 000 allowed. If a small part of it was deductible, that bit would not come out tax-free, but then the taxpayer could still use the R300 000 tax-free allowance (assuming that has not been used before).

Benefits

The client has been given an investment in an untaxed portfolio, which is fully liquid for the family, free of executor’s fees and estate duty, and in most cases, tax-free when it pays out. No other investment product can match this.

Conclusion

RAs are an integral part of a client’s estate planning since the regulatory changes last year. All elderly clients should be using them as an estate duty shelter.