Updated: Feb 16
Whenever the subject of estate planning pops up in conversation, it is easy to get caught up in all the big terms and catchy phrases. One is rarely reminded of the importance of ensuring that your estate is liquid and able to afford the expenses related to winding-up the estate. While there admittedly are a lot of important things to keep in mind, it is just as important to remain mindful of the practical cash flow implications of winding-up an estate. If your estate planning doesn’t take into account the liquidity of your estate, there can be unintended consequences for your loved ones.
Solvency vs Liquidity
Effective and purposeful estate planning most often centres around the solvency of an estate: whether the total value of the assets exceeds that of the total liabilities. Although solvency is without doubt the most important consideration in estate planning, it is by no means the only important factor to consider. Just because the value of an estate’s assets exceeds that of its liabilities does not necessarily mean that the process of winding-up is guaranteed to be as expeditious and (relatively) simple as one would prefer. It is important that there is enough cash in the estate to cover the administrative expenses and claims against the estate. A lot of the assets in an estate can be immovable property, financial assets and shares – assets that are generally harder to liquidate and reduce to cash.
Why is liquidity important?
When the liquidation and distribution account is drafted, the executor (or agent) needs to draft a ‘’cash recapitulation statement’’ as well. This is to determine the liquidity of the estate. The executor (or agent) needs to set out the cash assets, liabilities, legacies and estate duty. This is to show the Master’s Office that the estate is liquid.
In the process of winding-up the deceased estate there are certain amounts that need to be paid out of the estate – these include the various administration costs, fees and other expenses that must be incurred when winding-up the estate. These costs include the following, but can vary in value, based on the size of that particular estate:
Master’s fees (payable to the Master of the High Court)
Estates with a nett value between R250 000.00 to R400 000.00 will incur a fee of R600.00, the minimum payable to the Master of the High Court;
An additional R200.00 for every R100 000.00 above R400 000.00 up until a maximum of R 7 000.00 also apply;
Executor’s fees and administration costs
A maximum of 3.5% of the gross total asset value of the estate can be asked by the executor of an estate for the winding-up of a deceased’s estate;
a maximum of 6% of all the income earned by the estate while being administered by the executor can also be payable to the executor;
Fees for valuations and appraisals
Based on the value of the property, the proposed basic tariff for property valuations operate on a sliding scale and start at R500.00 for a property with a value up to R50 000.00;
For all properties with a value of more than R 50 000.00, the proposed basic tariff increases along with an additional tariff which is applies for every additional R 100 000.00 in the property’s value – an expense any estate with immovable property has to incur as valuations are required for the transfer of immovable property;
Conveyancing and transfer fees
Where immovable property is involved one would need the professional help of a conveyancer or conveyancing attorney. Although these professionals are likely to set charge their own fees (and these being dependent on the value of the property being transferred from the deceased’s estate to his / her heir) one generally needs cash to pay these accounts and cannot rely on the value of a property to provide for this;
Estate duty is calculated at 20% of the nett value of an estate. That is, 20% of what is left after all the liabilities have been deducted from the value of the assets. As is evident, this is by far the largest part that will have to be paid by the estate and can have a big impact on what loved ones eventually inherit.
Income tax and capital gains tax
Capital gains tax forms part of the income tax of the deceased. It is ‘as if’ the deceased sells all of his/her assets upon his/her death.
Consequences if the estate is not liquid?
Failing to ensure that your estate is able to pay for all the costs in administering and winding up thereof is often the reason for long delays in the process. Not only would the executor need more time to be able to sell certain assets, the sale of properties and vehicles generally entail rigorous administration and could possibly incur more costs. The executor might also be forced to sell these assets at prices that are well below their market value (not to mention their sentimental value) and for less cash than one would have received for them should it have been a planned sale. For example, the executor might need to sell a vehicle or even the family home if the estate does not have enough cash to pay for the expenses relating to the winding-up of the estate. Alternatively, the heirs may choose to pay the cash shortfall themselves to ensure that the assets are not sold. Either way, this is not an ideal situation and one which could be avoided through comprehensive estate planning.
One possible option to consider which would provide necessary liquidity for the winding up of your estate is naming your estate as the beneficiary of a life insurance policy. In doing so, your life insurance benefit will be paid directly into the bank account of your estate and could cover the necessary expenses that will have to be incurred, while safeguarding your loved ones against having to wait for much-needed closure in already stressful times.
Another possible solution is to take out specific insurance in relation to the administration costs. You are able to calculate your liquidity and determine more or less the cash amount needed for your estate upon your death. The insurance will then pay out the insured amount on your death and this will ensure that it is far less likely that your assets would have to be sold or that your loved ones would have to pay ‘into’ the estate to cover any shortfall.
Albert Einstein famously said ‘’nothing is certain except for death and taxes’’. Perhaps a more accurate statement would be: nothing is certain except for death, the high cost of winding-up estates and taxes.