Gareth van der Merwe

Director, Private Wealth Manager & Fiduciary Specialist

Estate planning is a challenging task, and even meticulous planning can be undone if an estate does not have sufficient liquidity to satisfy the compulsory administration costs and liabilities due in the event of death.

The issue of liquidity within a person’s estate when they pass away tends to be overlooked by many, resulting in unnecessary negative consequences at an already difficult time. People assume that if there are no assets in their estate and possibly only debt, that this will be written off, which is completely incorrect. Unfortunately, family members can be held liable for the repayment of any debt included in an estate, whether incurred when the person was alive, or incurred in the process of winding up of the estate.

Besides needing liquidity to cover debt, having sufficient liquidity in an estate is necessary in order to pay for administration costs, such as the fees for the executor and master, transfer costs for the property, motor vehicles, etc., as well as any outstanding liabilities from debts as mentioned above.

A person needs to differentiate between Solvency and Liquidity in their estate. Solvency is simply where the total assets in your estate exceed the total liabilities, while Liquidity on the other hand refers to whether an estate has sufficient cash, or assets which can easily be reduced to cash, in order to settle the liabilities and immediate costs, without having to sell assets that would otherwise be left as an inheritance for beneficiaries.

It is therefore not enough to simply have a solvent estate if your dying wish is to leave a legacy for Heirs. An estate with a cash shortfall lacks liquidity and can cause unforeseen negative complications in the administration and winding up of an estate for your beneficiaries, including financial implications. In the event of a cash shortfall, the executor may either request that the beneficiaries settle the amount themselves, if their wish is to retain specific bequeathed assets, or they may be forced to sell certain assets, such as houses or other properties to raise the money.

Below the specialist provided a basic breakdown of the lesser-known element of administration costs associated with winding up of a simple estate, with a gross asset value of R1 million:

Activity Cost in Rands
Advertisement to creditors R432
Advertisement of liquidation and distribution account R432
Postages and petties R260
Estate late bank account – provision for bank charges R500
Executor’s fees (3.5% + VAT) R40 250
Master’s fees R1 800
Conveyancing attorney: estimated transfer costs R12 000
Conveyancing attorney: estimated rates clearance costs R4 000
Total costs  R59 674

The size of an estate will also affect some of the costs incurred within an estate, such as executor’s and master’s fees, though the latter is capped at R7,000, as well as conveyancing costs. It is also worth remembering that an estate is liable for income tax assessment until the date of death and depending on the assets and liabilities in the estate, these may attract Estate Duty and Capital Gains tax as well, however an estate has an increased Capital Gains exclusion of R300,000 as opposed to R40,000 for a living individual.

Do not underestimate the value of estate planning, regardless of how big or small the value of your assets is. By completing a comprehensive estate plan with your Private Wealth Manager will put you in control of your last wishes and ensure that your dependents and/or Heirs are looked after the way you intended.