Ensuring Liquidity in an Estate

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Ensuring Liquidity in an estate and the importance thereof

A company needs sufficient liquidity to sustain its operations. A person needs sufficient liquidity to sustain a household. An estate needs sufficient liquidity to ensure the proper finalization of the estate and peace of mind to the deceased and those left behind upon his / her passing.

Why is liquidity necessary in my estate?

It is estimated that 46% of deceased estates in South Africa have insufficient cash to cover the liabilities and administration costs of the estate. This simply means that the estate does not have enough money (in cash) to settle various liabilities arising during the administration process.

Insufficient liquidity will have negative consequences to the heirs of an estate as a cash shortfall often means that assets of the estate must be sold to increase liquidity, thereby eroding the inheritance of those left behind. If an estate has insufficient assets to cover the liabilities, the heirs may be obligated to pay money into the estate in order to settle the various liabilities.

What are the applicable costs to an estate and the winding-up thereof?

Apart from settling outstanding debt and liabilities, costs to be covered from estate funds include income tax, capital gains tax and estate duty obligations, valuation costs on assets, transfer costs of fixed property and executors’ remuneration, to mention but a few.

Calculating the debts, valuation costs and transfer costs are relatively simple; the obligations arising in respect of income tax, estate duty and executors’ remuneration are more complex and are often costly. The intricacies of income tax, capital gains tax and estate duty can be found here: https://www.asl.co.za/deceased-estates-and-the-various-tax-implications-applicable-on-death/

Executors’ remuneration is charged by a duly appointed executor by the Master of the High Court and as nominated in the will of the deceased, for services rendered in respect of the winding up of the deceased estate. The Administration of Deceased Estates Act 66 of 1965 (“the Act”) limits the amount of remuneration charged on an estate to 3.99% (inclusive of VAT) of the deceased’s gross assets on the date of passing. The gross assets are calculated as the sum of all assets owned by the deceased reduced by assets explicitly excluded as determined by the Act, such as retirement annuity / pension / provident funds held by the deceased.

The remuneration is not a fixed amount and can be negotiated between the heirs and the appointed executor. Factors to consider during these negotiations include the complexity of the estate, the magnitude of the estate and the nature of the assets and liabilities in the estate.

How can I ensure sufficient liquidity in my estate?

Each estate is unique and a one-size-fits-all approach, unfortunately, does not exist. Due care should be taken to ensure the needs of your estate are catered to during your lifetime. Consideration should be given to the following:

  1. Life insurance
    A life insurance policy is a cost-effective manner to ensure an estate has sufficient liquidity on the date of the deceased’s passing. These policies may be tailored to suit individual and/or specific needs and can be reviewed regularly and duly amended to ensure peace of mind.
  2. Thorough estate planning
    It is important to know prior to one’s passing what one’s estate entails, this is done by thorough and continuous estate planning. It is necessary to obtain expert advice in this regard to ensure that the estate has sufficient liquidity and that an accurate estimate of the various tax implications can be made and provided for.

Get peace of mind and know that your loved ones are taken care of, contact our team of specialists to help you plan your estate.

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