FINANCES
Importance of financial needs analysis
Raymond Peters has just bought a house in Houghton worth R12 million . Raymond tells the financial planner that he needs bond cover for R12 million , to be ceded to the bank in the event of his death . He assures the financial planner that he doesn ' t want a financial needs analysis ( FNA ). Raymond is the financial director at The Professionals ( Pty ) Ltd .
The financial planner sells Raymond a policy structured as follows : Policy owner , payer and life assured : Raymond ( collateral cession to the bank ) Beneficiary : His spouse
It is explained to Raymond that the cession to the bank means the bank will get paid in the event of death , but if that cession should be lifted , having his wife as a beneficiary means that there will be no estate duty . Raymond is satisfied with this arrangement .
When things start falling apart Three years later , Raymond is killed in a car accident . It becomes clear that , without an FNA , Raymond has grossly underestimated the amount of cover he needed to protect his estate .
Raymond , the financial director of The Professionals ( Pty ) Ltd , was also a shareholder in the company , he held 34 % of the shares . The company had needed start-up capital and Raymond had stood surety , jointly and severally , together with the other two shareholders , for company debt . His widow does not work and they had two minor children . Raymond also had a minor child , Jack , from a previous relationship , for whom he was legally liable for maintenance .
The R12 million life cover was paid to the bank .
The finance house which held the company ’ s debt , decided that as Raymond was a key individual , they no longer had confidence in the viability of the business and its ability to settle its debt . They called up the loan . In terms of the suretyship agreement the finance house proceed directly against Raymond ' s estate . Raymond ' s executor would need to recover the difference from the surviving shareholders or alternatively would have a right of recourse against the company for the debt paid on its behalf , hopefully the surviving shareholders or company would have sufficient cash / assets to meet the obligation !
Jack ' s mother submitted a maintenance claim against Raymond ' s estate .
The single biggest asset in Raymond ' s estate was his shareholding in The Professionals ( Pty ) Ltd , which company rapidly lost value after his death , followed by the family home . On reading his will his wife also discovers that Raymond bequeathed his assets to a trust .
WHAT NEEDS SHOULD THE FINAN- CIAL PLANNER HAVE IDENTIFIED , IN ADDITION TO THE BOND COVER ?
Contingent liability : A company-owned policy for each of the sureties , increased with estate duty . which would have been used to settle the debt the shareholders stood surety for .
Buy-and-sell arrangement : Raymond ' s fellow shareholders should have had a buy-and-sell agreement , funded by life insurance , in place to purchase Raymond ' s shareholding from his estate . This would have made the cash available to his estate for debt , expenses , taxes , creditors and his dependants .
Key person cover : Raymond was a key person in the company . The business would have benefited from having this cover to tide them over the months immediately after his death .
Estate liquidity : Executor ' s fees of 3.5 % ( Excluding VAT ) of the gross value of his property as at date of death .
Capital gains tax : Effective rate of 18 % Maintenance claim by minor child . Accrual claim Estate duty over R3.5 million .
The financial planner should then have done a personal financial needs analysis to make sure that there was enough cash to meet the estate liquidity needs , and also enough left over to be invested to produce an income for his spouse and children .
Give his desire for his estate to devolve upon a trust , the financial planner should have taken into account the trust , the need to provide specific maintenance for Jack , and the need for liquidity in his estate .
Now that Raymond is dead , how does a person explain to Raymond ' s dependants why the relevant questions were never asked ?
50
SENWES SCENARIO | WINTER 2018