Estate Liquidity and Costs

 The reality of Estates

Statistics show that as many as 1 in 4 estates has insufficient funds to pay all costs and debts.

Even in estates where assets exceed liabilities, there may be a cash shortfall to cater for debt and costs.

Should the heirs not have the cash available or the means to raise the cash required, assets may need to be liquidated. Even if there is funds available, it may be invested.

The forced sale of assets will often yield a lower return than market value and may further compound the cash shortfall as result of taxes to be paid.

By example: the Primary home where the surviving spouse and children reside, is bequeathed to the said surviving spouse. The property is valued at R2m with a mortgage bond of R1m. The bond will need to be settled and if there is no cash liquidity in the estate; and should the surviving spouse be unable to secure a mortgage bond; the property may need to be sold in order to settle the mortgage bond over the property.

After the Liquidation and Distribution account has been approved by the Master, the Executor first has to pay all creditors, costs and taxes before legacies can be transferred or paid.

As per the Administration of Estates Act, the Executor is obliged to finalise the Estate within 6 months from the date that the Liquidation and Distribution Account has been approved by the Master of the High Court. Should there be a liquidity shortfall in the Estate and the heirs are unable or unwilling to fund the shortfall, the Executor will have no alternative but to liquidate (sell) assets

Terminology explained:

The term “Legacy” refers to the specific assets bequeathed to a beneficiary, i.e. primary residence to my spouse

The Term “Residue” refers to the portion of the assets in the estate not specifically bequeathed, in other words, the assets/property left over after the deduction of specific bequests, debts and taxes, i.e. residue in equal portions to my children. Whomever inherits the residue of the estate in effect carries all the costs of the estate.

The term “Heirs” refers to the beneficiaries who inherit the residue of the estate.

Costs of an Estate

There is really no rule of thumb to estimate the associated cost in an Estate. The cost is determined by the value of the Estate. The following costs will however apply:

  • Bank charges for the Estate
  • Local Newspaper – cost of advertising
    • Debtors & Creditors
    • Account open for inspection at the Master
  • Government Gazette – cost of advertising
    • Debtors & Creditors
    • Account open for inspection at the Master
  • Transfer costs in regard to fixed property
  • Valuation costs
  • Master’s fees
  • Executor remuneration
    • 3.5% + VAT on total assets (before deduction of liabilities and costs)
    • 6% + VAT on all income generated in the Estate

Liabilities against the Estate includes, but not limited to:

  • Mortgage bonds over fixed property
  • Finance over movable assets, i.e. motor vehicle finance
  • Funeral expenses
  • Deathbed expenses such as hospital and doctors
  • SARS final assessment
  • Estate duty
    • 20% of the value over R3,5m to R30m
    • 25% of the value over R30m

Recommendations

To avoid nasty surprises and financial woes after death, I recommend the following:

  • The drafting of an Estate Liquidity Plan
  • The drafting of a comprehensive Estate Plan
  • In certain instances life policies to specifically cater for Estate costs and liabilities is advisable
  • Ensure sufficient funds earmarked and bequeathed to “Residue” to cover the various costs and liabilities
  • In certain instances fixed property may be earmarked for disposal after death – ensure property valuations are obtained from Mater approved valuators.

In closing

Over my many years in business, I have often dealt with bereaved families trying to make sense of the Estate process. The better prepared you are prior to death the more seamless the Estate process will be for those you leave behind.

Please feel free to contact me for assistance with implementing some of the recommendations suggested.

Published On: July 16th, 2018 / Categories: Estates, Wills / Tags: , , , , /

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