In life, very few things are simple. Simplicity fools us and taunts us as we stumble through a complex world. Simplicity is the irresistible Lorelei enchantingly singing to us from the shore across the river. The Lorelei that will look on uncompassionately as our boats crash against the rocks as we try to reach simplicity that lies on the other side of complexity.
Jeffrey Kluger beautifully illustrates how simplicity misleads us on so many fronts in our modern lives in his book Simplexity – the simple rules of a complex world – and invites us to consider a different approach – Simplexity.
I echo his plea from my area of specialisation.
The Modern Fallacy
There seems to be a growing chorus of financial and fiduciary service providers enchanting the masses to solve all their estate planning issues by simply doing a will. Don’t get me wrong, having a will is important and reviewing your will should be a two-yearly habit. Some wills are very simple and there is no need for massive estate planning to be done.
But this is where simplicity fools us.
Any will that is drafted for any person should be the result of some form of estate planning. Estate planning can only be done if you understand the data that underpins your planning and the legal environment in which you live, or in which the assets exist.
The will itself, is the final step of a planning process and the fact that the will is simple means that the complexity has been absorbed to find the simple answer or the simple will at the other end of complexity.
All estate planning processes should start with knowing what you own and who you owe. This is critical in understanding what you will leave behind and what is available to distribute to heirs. For example:
- Debt is repaid before we even consider your bequests.
- Debt could include loans being called up for you stood surety.
- Obligations like estate duty, income tax, capital gains tax, administration costs and transfer duty are also payable before the heirs receive their inheritance.
- Your marital obligations rank higher than the rights of your heirs.
- Maintenance claims also trumps bequests.
Considering these data-points and collating the information will have greater value in the process of transferring your wealth than a “simple” will.
A will that does not consider these data points is worse than dying intestate (which means – without a will). In other words, a will that is badly drafted or drafted without considering the assets, liabilities and obligations is worse than not having one.
Planning Matters More
The will you sign is the final step of a planning process. In this planning process you (or your advisor) should not guess the law, nor guess the maths.
In our environment we collate all the data points, map them in our software and then do proper planning based on the data that have been provided. This allows us to simulate the death scenarios and put the will to the test. It also allows us to amend the plan as the data changes over time.
Peace of mind lies in the fact that someone has recorded the data points, knows where everything is and will be able to execute the wishes in the will easily and effectively. More than 90% of delays in the administration of a deceased estates are avoidable by collating the data and basing the planning on the data.
A few things come to mind that require more planning:
- Liquidity shortfalls in the estate. If there is not enough cash to pay what needs to be paid, assets that were planned to go to legatees might have to be sold. This is obviously a problem that requires a solution. The solution is not always taking our more life cover – its only one option and then the life cover should be taken out correctly.
- Exposure to death taxes and taxes on death sometimes create the liquidity problem but could be avoided through the diligent use of trusts. Execution of the plan therefore might include creating a trust.
- Assets located in other countries might require a deeper dive into the legal environment of those jurisdictions. In some cases, a second will might be required or the structure in which the asset is held might have to be changed.
- Heirs who are minors or who live in other countries often requires special planning. For minors you need to have a clear understanding about their personal well being (who they will stay with) and their financial well-being (who will look after their money). The age and the whereabouts of heirs are important data points.
Adaptation Should be a Constant
The fact that things around us are in a constant state of change, is a complication. A plan or a will that works today, might not work in three years’ time. There are so many data points that change over time:
- We buy assets and we sell assets.
- We repay debts or make additional debts.
- Heirs pass away and heirs are born.
- Minor children become majors.
- People become independent from us or become dependent on us.
- We divorce and remarry or get married.
- Tax law and taxation rates change.
- We change advisors, or advisors move on to other businesses.
By pinning down the data-points, we will become aware of what is changing. By knowing what is changing we will be drawn into reviewing the plans. Reviewing the plans would result in updating that simple will to another simple will that now reads slightly differently.
Let’s rather find the simplicity at the other end of complexity together. Let’s embrace our simplexity and shield our ears from the enchantment of the simplicity industry.
Written by Louis Venter, Fiduciary Specialist at Carrick Consult