Achieving financial freedom and building a lasting financial legacy is a goal for many South Africans. In the first of a two-part Zoom webinar, hosted by Noluyolo Betela, the panel unpacked many of the practical and legal considerations when building your legacy. Watch a recording and read a summary of the key takeouts below.
Key takeouts
1. Define your financial legacy and put a plan in place
The idea of building a financial legacy is seen as being out of reach for many people, but Phiko Peter, client relationship manager at Allan Gray, suggests that defining your financial legacy is a deeply personal exercise, “Legacy does indeed mean different things to each of us, whether it be building up sufficient reserves to ensure that you are adequately prepared for life and those unexpected events, or being able to send your child to the best school available, or even acquiring a property for your family.”
Peter says that putting a plan together is the first step, “Regardless of what legacy may mean for you, I think we can all agree that our salaries can only take us so far. It is therefore important that we set goals for our money and that we consider investing as a way of achieving these goals.”
2. Understand your financial products
When you start an investment or take out a policy, you are effectively entering into a legal contract with a financial services provider. These contracts stipulate the rights, obligations and responsibilities that you, as an investor, and the financial services provider must adhere to. “Ninety percent of the rules will be restrictions that are imposed by the law,” says Lebona Khabo, legal adviser at Allan Gray.
Khabo acknowledges that it can be daunting to familiarise yourself with the terms and conditions of these products, but this is essential to making sure that your investments will help you achieve your desired outcomes. Getting the answers to the following questions is key:
- When can you access your money?
- Are there limits to how much you can contribute?
- What are the benefits of your contributions?
- How long does it take to access your investment?
This becomes particularly important when comparing various products, such as basic unit trusts, tax-free investments and endowments. You need to ensure that the products you pick are appropriate for your circumstances.
3. Ensure that you have a valid will in place
To ensure that your loved ones are taken care of, you should have a valid will in place. A will is a document that you draw up to indicate how your assets should be distributed in the event of your death.
Attorney and founder of Sister In Law SA, Tebello Motshwane, says that it is advisable to get professional advice when drafting this document. “There are quite a number of requirements which have to be followed in order to ensure validity of one’s will. The best way to go about it is to consult with an attorney or with a financial adviser.”
You must keep your will up to date. Says Motshwane, “I always advise clients to review their will whenever there is a life-changing event.” Important life-changing events include the birth of a child, the death of a beneficiary, marriage and divorce.
4. Understand what will happen when you die
The various investment products and life policies available are subject to different rules around how the benefits are allocated when you die. Some financial products allocate the benefits to your estate, some allocate the benefits to your nominated beneficiaries and some products, such as retirement fund benefits, are allocated to your dependants.
It is important to understand how these benefits are allocated and how long it may take for each of these financial products to pay out upon your death so that you can ensure that your loved ones are taken care of over the short and long term.
5. Seek professional advice
When it comes to estate planning, you need to consider the law, the rules that govern your financial products, and tax. This can become an incredibly complex task. By way of example, you may want to invest on behalf of a child to give them an invaluable head start; however, you will need take the following into consideration:
- Minors (children under the age of 18) do not have contractual capacity, which means they cannot legally enter into a contract with an investment manager without the assistance of a natural or legal guardian. Therefore, you will either need to set up an investment for the child in your own name or the legal guardian of the child can set up and administer the account on the child’s behalf.
- At 18, children become majors and gain contractual capacity, giving them the ability to access and manage any investments in their own name as they wish.
As such, it may be necessary to make use of complex legal vehicles, such as trusts, to ensure that any funds you have accumulated are used in the way you intended. Consulting an independent financial adviser and/or an attorney is the best way to ensure that your unique circumstances are catered for and that you leave your loved ones with the legacy you had in mind.