It is contended that 1 in 4 of all South African estates has insufficient funds to cover the costs of administering it. This causes extensive (read months to years) delays in the administration process.
The lack of available cash can lead to heirs’ inheritance having to be sold in order to generate the cash required to administer the estate, or even that the heirs (pro rata) will have to contribute to protect their inheritance.
It often occurs that the deceased’s assets exceed his liabilities but that there is not adequate available cash to cover the costs/liabilities of the administration process, for example, outstanding loan accounts, mortgages, tax and other administrative costs.
Even if the surviving spouse has enough cash to cover the costs associated with the administration of the estate, in practice it is mostly tied up.
Capital gains tax (CGT)
The compulsory sale of an asset can bring about further tax implications, depending on the status of the property.
If a second property (investment property) is bequeathed to the surviving spouse in terms of a will, CGT only becomes payable on the death of the surviving spouse (CGT rolls over). However, should the executor be compelled to sell the property due to a shortage of cash, CGT will become payable immediately.
When the Liquidation and Distribution account has been approved by the Master of the High Court the executor must firstly pay the creditors, administration costs and SARS. Thereafter the executor will firstly make disbursements to the legatees and lastly pay the residue to the heirs. Whoever inherits the residue in terms of the will, will effectively bear all the costs.
The administration costs of an estate further consist of the executor’s fee and the Administration of Deceased Estates Act 66 of 1965 (“the Act”) determines that an executor’s fee is limited to 3,99% (VAT inclusive) of the gross assets of the deceased as calculated at the date of death. This fee is negotiable.
As from 1 January 2018, the Master’s fee is calculated on a sliding scale tariff. If the deceased’s gross asset value falls between R250 000.00 and R400 000.00, the Master’s fee will amount to R600.00. For every R100 000.00 above R400 000.00, R200.00 is added up to a maximum fee of R7 000.00.
In order to avoid a cash shortage at death it is important to do thorough estate planning, that includes an estate liquidity plan.
A cost-effective way of ensuring that an estate will have sufficient cash available is to take out life cover that will be payable directly to the estate. The policy can even provide for the nomination of a beneficiary who will receive a portion of the pay-out while the balance is payable to the estate.
However, should there be sufficient cash in the estate you should be careful not to bequeath all the cash to a legatee. Make sure that there is enough cash available in the residue to cover the estate costs.
Feel free to contact Inge at firstname.lastname@example.org for any further inquiries.