The hidden costs when you die in South Africa

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.

This is according to Trisca Hattingh, head of fiduciary services at leading wealth and financial advisory firm GTC, who said that the issue of liquidity tends to be overlooked by many, resulting in unnecessary negative consequences at an already difficult time.

“Having sufficient liquidity in an estate refers to the level of cash available to cover the administration costs, such as the fees for the executor and master, as well as any outstanding liabilities from debts raised by the deceased.”

Hattingh said that she has seen many estates – both large and small – where individuals mistakenly think that liquidity and solvency are the same thing, which could explain why cash shortfalls have become a frequent occurrence in recent times.

“Solvency can be explained as a scenario where the total assets in your estate exceed the total liabilities.

“Insolvency, therefore, is the event where – after the sale of every last asset – there is still not enough money to settle the liabilities in your estate. This also means that there will be nothing left for heirs to inherit,” Hattingh said.

Liquidity, on the other hand, refers to whether an estate has sufficient cash – or assets which can easily be reduced to cash – to settle the liabilities and immediate costs, without the need to sell assets that would otherwise be left as an inheritance for beneficiaries.

“Therefore, it is not enough to simply have a solvent estate. An estate with a cash shortfall lacks liquidity and can cause unforeseen negative complications in the administration and winding up of an estate,” Hattingh said.

In the event of a cash shortfall, the executor may either request that the beneficiaries settle the amount themselves – if they wish to maintain specific bequeathed assets – or they may be forced to sell non-liquid assets, such as houses or other properties to raise the money.

“While it is unpleasant to have to handle when a loved one has recently died, consideration must be given to the deceased’s liabilities – including mortgages, vehicle finance and other personal loans because these do not dissolve upon death.

“These must be settled by the executor, from the estate, after which time the distribution of the balance of assets may take place,” Hattingh said.

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% on R1 million, plus 1% on VAT fees) 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

Hattingh said that the size of an estate is likely to affect some of the costs, 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.”

Hattingh said that the best way to avoid unforeseen negative consequences for loved ones is by way of thorough estate planning with a professional financial adviser.

“Do not underestimate the value of estate planning – regardless of how insignificant you may think your estate value is.

“Completing an estate or financial plan with your financial adviser is the best way of ensuring that your loved ones will be left cared for and receive all the assets you intend for them to have, without having to sacrifice your home, means of transport or future income streams to cover your liabilities,” she said.

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The hidden costs when you die in South Africa