How to survive death
(This article was written February 11, 2004 & February 18, 2004 as part of the weekly series of PetesWeekly.Com articles, but it is still just as relevant today.)Just over 6 weeks ago Alan Greenwood was shot dead in his factory - for his cell phone and his shoes. You might ask what the hell he was doing at work on December 30th, but if you're a small business owner you understand it exactly. Tragic? Extremely. But we South Africans have become blunted to the daily toll of violence and death. That's not the point of this awfully sad story, however, because I love living in this country - as do most of us.
The real tragedy has unfolded quietly over the past 6 weeks. And this is a story that affects every single breadwinner who dares to venture forth as a business owner. That's most of us reading this article. May I humbly ask that you forward this free weekly to anyone you know that owns a business?
I first met Alan in 1999 when he attended our Trusts for Business Owners seminar, and he subsequently became a regular at almost every different seminar I hosted - asking far too many questions - but always with a gentle sense of humour that showed his genuine interest in getting stuff right. Although I guiltily missed answering a bunch of his emails, those that I managed to get to were always followed by his generous thanks. A man who delighted in helping others.
The attorney I recommended had been involved with structuring his Trusts from 1999, and I knew how pedantic they both were about getting the detail right - so I suspected that his family would have no financial problems following his death. I knew his policies were probably structured correctly - and I expected he would have provided well.
And he did. But today [Wednesday Feb. 11] I learned more about the economic aspect of death than I want to. It's uncomfortable knowledge, but if we - as business owners - do not accept the stuff I am about to share with you - and do something about it now - then we may as well cancel our policies and spend the money on beer! At least we'll have some fun with it before we go, because for most of us business owners - our provisions for our families are meaningless!
I am writing this while sipping a Villiera Merlot that I should have shared with Alan on one of those lunch dates we never quite got to. And wherever he is right now I know he is looking down and saying "Hey Pete, give those bastards hell!" So here it is.
The day after his death, his business bankers froze the company bank account. This is normal practice if the business owner has died. In Alan's case, his business was owned by a Business Trust - and the bank re-opened the account after getting the appropriate documentation.
If his business was not owned by a Trust the standard procedure would be:
- for the account to stay frozen;
- for SARS to conduct a complete investigation into the firm to retrieve any outstanding taxes - based on a Capital Gains Tax evaluation of the business as a going concern on the date of death - or based on the CGT valuation submitted as part of the current drive;
- for SARS to demand all such outstanding taxes, including CGT - even though the frozen business would be now by worthless, and since the firm would have no value, to extract these funds from the personal estate of the dead business owner;
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- for any business creditors holding sureties to demand payment from his estate for outstanding business debts.
- leaving almost nothing for his family. [The Law allows just R50,000 to be given to the family from an insolvent estate.]
In Alan's case, his structure was solid and his Business Trust ensured that SARS would stay out of the picture for now. In fact, coincidentally a SARS official did call his office on Jan 5 to speak to him. Janet [Alan's widow] told the SARS fellow this wasn't possible, and when the SARS fellow insisted, Janet told him that Alan had been killed the week before. Conscientious, as always, the SARS fellow asked if she had notified her local SARS office yet! Have you ever had the feeling that you are merely an economic mouse on an eternal treadmill?
And this is where the fun starts. We invest in life assurance for our entire lives - on the assurance that our families will suffer no financial hardship when we die, don't we? And despite all the assurances and glossy advertising, the reality is different. No life assurance firm will pay out without a bunch of formalities - including a death certificate.
But there is a twist. If you die in 'unnatural circumstances' (and being murdered is high on that list) then no life assurer will pay out until the post mortem results are in, and the police are satisfied that the beneficiaries were not responsible. [Nobody can benefit from his own crime.]
Stills sounds quite reasonable, doesn't it? But let's look at the reality a little closer.
- Post mortem results take a minimum of 6 weeks to type in SA! And if you are blessed with a slow typist, or he's busy elsewhere, or sick, or his machine is broken - well that's about par for the civil service. And God forbid you should try and chase up the process because your kids are starving and you haven't had any income for 6 weeks - because 'they' simply shuffle your paperwork to the bottom of the pile - a fact explained to Janet by a kindly administrator.
- You would think that the life assurance firms might be interested in the death of a premium payer - but you would be wrong. As long as they have not yet received ALL the CORRECT paperwork, you are alive - because the paperwork is wrong. Which means that they will continue to debit your account, and hassle your widow for premiums - as one of Alan's brokers did. Today [Feb. 11] I contacted the 3 life assurers who covered Alan, and to whom he was paying about R5000 each month - and one had no clue that Alan was dead; another had finally noted this on Feb. 9 (5 weeks and 6 days after his death).
- In fact, it appears that the life assurers are so pedantic about this paperwork that the various administrators won't even try to notify them about a death until ALL the paperwork is in. I simply can't reconcile that approach with the caring attitude espoused by the agents and brokers, and the glossy gorgeous marketing materials.
- The various folk I spoke to at the 3 companies involved were extremely sympathetic, and acknowledged that 'this is a problem' but that it 'was the law' and did not have an adequate solution to the problem. One of them even commented that it was about time that somebody raised this issue as her Dad's policies had taken between and 3 and 6 months to resolve.
One senior official suggested that having a funeral 'rider' on the policy [an immediate no-questions-asked payout of up to R20,000 to cover funeral expenses] might help. Janet tells me that Alan's budget funeral [he hated wasting money] cost about R15,000 - so that's not too solid an option. But the bottom line, folks, is that we have a problem. Not us, actually, but our wives and children!
When you know that every single policy holder is going to die - surely it makes sense to document the procedures his family should follow - and to share these with your clients so as to minimise their pain and distress, as well as smooth their fears? Yet no company publishes such procedures in a book, booklet, pamphlet or web site - at least nothing they have shared that with either Janet or me.
It's now 6 weeks and 2 days later. Janet hasn't had an income since Alan's death. And there is no certainty about exactly when she might. She is currently running his firm - because it is owned by a Trust - and is just hanging on personally. But she is also spending large swathes of time chasing the various parties who seem intent on delaying the process.
Nobody seems to care!
How would you feel if this was your wife? How would you feel if you paid premiums scrupulously every month, in anticipation of service at the one time you needed it - and believed you were paying for - but never quite arrived? How would you feel if the same folk you were paying this money to every single month omitted to mention this tiny, minor flaw in their products - even if it wasn't their fault? How confident would you feel about the veracity of their claims of caring? How confident would you feel about their integrity in speeding up the claims process so that they could pay out the funds earlier?
And that's the way I feel right now - deeply pissed off that I have bought into a comfort zone that doesn't exist. And I will not let this happen to my family.
I was talking to Janet today about the challenges she is facing, and I was concerned that my firm might be benefiting from sharing this story. "Alan would have loved you sharing ideas that will give the bastards hell!" she said.
That wasn't all I learned, so allow me to share this little gem with you. When you claim death benefits against your Retirement Annuity, there is an interesting little gremlin. The life assurers will not pay out until they have received a tax clearance certificate from SARS - which means that all your personal tax returns must be up to date. To be frank, I am not sure that I know of any business owner in that situation - which means months/years of work to get the paperwork sorted out, followed by the usual high speed efficiency we have come to expect from SARS.
Why isn't anybody sharing this stuff with us? Why is there no published documentation from the firms we're entrusting our families to? These are the same firms that we little guys [12000 readers at a (really low) minimum of R1000/month premiums each ] are paying R12 million to each month - yet nobody seems to have even thought of addressing this tiny, insignificant hole? And with our chances of being killed in active duty a tad higher than the chances of the average civil servant - this is a problem that dozens of women must be facing each day! Not just the wives of business owners!
So here are a few quick Villiera-derived thoughts on how to alleviate this challenge for the moment:
- Tell your wife how to clear your accounts, and instruct her to do this the day you die - no matter what happens - so that she can have enough funds to survive until the life assurance eventually pays out.
- Help your wife get as many personal credit cards as she can while you are still a financial bulwark in her life. She will need this to finance her as she waits. And she will struggle to get them once you are dead.
- Keep a survival float in her name. On your death all your accounts will be frozen. If you are married in community of property - all of hers are frozen as well! In this case keep this float in your Family Trust. Credit cards pay great interest rates on positive balances - and that's a good place to invest it.
- Put your business shares into a Business Trust now, or convert your business into a Trading Trust! Otherwise you're inviting SARS to attack you, and you're inviting your bank to close your firm the day you die. [How on earth can your firm operate without a bank account?] And you're effectively retrenching all your staff on the day you die. I wrote an article on this earlier in the year - you will find it here: http://www.petesweekly.co.za/tradingtrust.htm
- Create a Family trust now to build up an estate outside of you personally - and this is especially critical if you are married in community of property - where the bank will close everything on the same day - including all your wife's accounts.
- And I am working on more - but it would be great if one of the life assurers actually looked at the problem seriously and offered some solutions. For starters, a simple amendment that would immediately free up 10% of the death value. They assure us it is because of the risk of fraud - but a small amount like this would mitigate their risk, and relieve a huge problem.
- Or how about a simple independent fund that immediately pays out 10% of the insured value, against the security of the policies - at a reasonable interest rate?
- Your ideas welcome. This is one boat we're sharing.
This whole issue of death is awfully distressing, but we can do a huge amount to alleviate the pain our loved ones experience. I want my family to survive my death without having to fight with petty bureaucrats - whether public or private. I want them to enjoy the fruits of my lifetime of monthly investments - not having to prostitute themselves to eke out payment from a batch of reluctant, recalcitrant, unhappy, hiding-behind-policy salary-earning. no-risk-running, employees whose salaries my premiums have been paying since Noah was a teenager.
Please use this knowledge today - before you get overwhelmed by all the daily urgencies in your life. It will be the best Valentines Day gift you can give the woman you love - and she will remember you for the rest of her life. I am already doing doing this as fast as I can.
And Alan, it's going to be a bit less interesting without you. Wherever you are, give the bastards hell!
February 12th, Umhlanga Rocks
PS I have not mentioned the relevant life assurance firms involved in Alan's case - on purpose - because I do not feel that they differ from any of the others. This seems to be an industry 'standard'. Which means that your life assurer is going to do the same. Please take action today. Your wife and kids are relying on you not to mess this up! And please don't forget to forward this email to anyone you know who shares these entrepreneurial challenges.
Deathly options...
Last weeks email on death and the speed of life assurance payouts sparked a huge response from 2 groups of folk.
The first group was mostly widows with sadly equivalent tales - and highlights that there is a real abyss here. I will be looking at the entire process over the next few months and publishing a web site on the subject, identifying shortcuts and actions that you can take to ensure that your family is not caught in this hole after you leave.
But the second group astounded me. Once again, the emails were from women (mostly married) who said that in discussing this issue with their husbands, the husband's view was that they should 'just pray that "it" doesn't happen'! Wow! Catch a wake up here guys. Death is not optional!
If you are one of those men, then ignore the rest of this email because it shows you how to save a few million rand on your death - which you don't need because you have this immortal thing going for you. (And if you, you wonderful woman you, have the good fortune to be married to such a god, then may I suggest you consider a new partner who will age gracefully with you?)
Most of us have a clause in our wills (last testaments) that establishes a Trust on our death (a Testamentary Trust) to look after the bulk of our estate for our loved ones. This is a different Trust from the Trusts I have been recommending in the seminars and on the web sites. I am recommending what is called an "inter vivos Trust" - which is a fine Latin term that means a Trust "created while you are alive". An inter vivos Trust can be used:
- own your personal assets to protect them from stray creditors and banks
- own your business[es]
- own your property[ies]
- "own" other Trusts
But that's a pretty boring way of looking at things, and last weeks article highlighted a HUGE hole in the planning of almost every business owner. Why is this important? I am glad you asked. If you own your business in your personal capacity, this is what happens on your death:
- The bank freezes the business bank account.
- The state values the business on the day of your death
- The business doesn't operate for a while
- Your executor gets appointed as long as 6 weeks later [and nothing can happen until then]
- SARS launches a full tax investigation into your firm looking for any outstandings
- All the assets are added up, and the liabilities are deducted [as at the day of your death]
- Your estate pays Capital Gains Tax [CGT] on the value of your business at the date of your death. This will be about 10% of the value, which must be paid in cash. If there isn't enough cash, your business and personal assets are sold until there is. This value will also include 'goodwill', and even a small business can be valued at more than R5 million for CGT & Estate purposes.
- Your estate pays Estate Duties (20% of everything above R1.5 million of assets) [including the value of your business on the day you died], which must be paid in cash, and if there isn't enough cash...
- Executors fees are paid at 3.5% of all the assets as calculated above
- All company taxes outstanding [VAT, PAYE, SDL, UIF, RSC, Income, STC] must be paid, plus penalties
- All personal taxes outstanding must be paid, plus penalties
- All bequests are paid
- And all surety claims are paid
- What's left is given to your beneficiaries or transferred to your Testamentary Trust.
If you own your business through a Business Share Trust, then this is what happens on your death:
- None of the above!
Actually, that's not quite true, but look at the huge difference in what happens:
- The business bank account operates as normal.
- The "owner" of the business - the Business Share Trust - cannot die - thus no reason for the business to be valued.
- The business operates as normal
- Your executor gets appointed as long as 6 weeks later [but all your affairs continue as normal as this has no effect on your business]
- SARS does not launch a full tax investigation into your firm looking for any outstandings
- All your assets are added up, and the liabilities are deducted [as at the day of your death] - but these do not include your business - because it is owned by the Business Share Trust
- Your estate does not pay Capital Gains Tax on the value of your business at the date of your death. This will save you about 10% of the value. And no business and personal assets are sold to raise cash.
- Your estate does not pay Estate Duties on your business - saving you about 20% of its value. And no business or personal assets are sold to raise cash.
- Executors fees are not paid - saving another 3.5% on the value of your business
- All company taxes outstanding [VAT, PAYE, SDL, UIF, RSC, Income, STC] do not have to be paid immediately, but rather in the course of business.
- All personal taxes outstanding must be paid, plus any penalties
- All bequests are paid
- The business continues to operate so no surety claims need be paid
- If you have structured yourself correctly, nothing is left because it was transferred into your family Trust while you were still alive.
Which would you prefer?
You are probably asking: "Who owns the shareholding in my business?"
- If you are a sole trader - you do. SARS wins.
- If you are a CC owner - you do. SARS wins.
- If you are a (Pty) Ltd owner - you probably do, [SARS wins] unless you have put your shares into a Business Share Trust [YOU win]
- If you are a Trading Trust - you don't. YOU win.
- And if you are in a partnership - you do. SARS wins.
Here are 2 things you can do now, armed with this knowledge:
- Do nothing. After all, it's not going to be your problem because you will be dead.
- Get more knowledge. Read as much as you want to about Trusts, and how to use them in your business life, at the Business Warriors website.
Action speaks louder than words. It's decision time.
February 18th, 2004 - Umhlanga Rocks
I stopped hosting seminars a few months after this article was published. One of the biggest challenges I faced was that the seminars left people with far too many questions, and me with far too little time to deal with those questions. It made sense to look at a new mechanism to support business owners. In March 2004 I founded the Business Warrior community which has proven an excellent way of being able to continuously support business owners - Trusts, knowledge, referrals, introductions, marketing, and a whole lot more. Please check us out at www.businesswarriors.co.za
Warm Regards
Peter Carruthers
