Legacy planning Part 4 – Liquidity in the estate

Liquidity in an estate is a crucial consideration, often overlooked by FSPs who do a ‘free will’ because they are focused on their executor’s fees. There are a couple of companies out there that have cottoned onto the fact that they can ensure their executors’ fees, under the guise of ensuring you have liquidity, by getting you to take out a life policy to cover that gap. Great in theory, but if you have been reading the rest of this series (Part 1, Part 2, Part 3)

You will know by now why I am not a fan of these. In short, this is more in their interest than yours, adds to the estate duty and can often be avoided by some decent estate planning (which, yes, may include a life policy to create liquidity – but still give your beneficiaries the flexibility of negotiating their fees.
 
Bottom line, if there is insufficient liquidity (cash, folding stuff, assets that can be quickly converted into cash) in an estate, the executor may be forced to ‘fire sale’ assets, like property.
 
Liquid assets are cash, bank accounts, money market funds, and life policies where the estate is the beneficiary. These are what the executor can use immediately to settle obligations. (Can you see why those companies love the life policies that go to the estate? Almost instant cash.)

Obligations the estate must settle in cash before heirs receive anything. 

• All debts and liabilities. One of the biggest problems is usually the bond on the property/ies. Even if the spouses are joint bondholders, the bank does not necessarily have to accept just the surviving spouse, especially if they do not meet the lending criteria. If nothing else, IMHO, you need to have a life policy for your largest debts – mortgages, short-term loans, even credit cards. Basic funeral cover is also not a bad idea. It pays out instantly and ensures that the funeral expenses are paid timeously (those details cannot be finalised until they have been paid, upfront, and (sorry for being so insensitive) ‘holding fees’ may also apply.
• Executor’s fee: 3.5% of the gross estate value, plus 15% VAT (the statutory maximum under the Administration of Estates Act). Remember, this is negotiable. I dealt with that in a previous chapter of this series.
• Other admin costs: Master of the High Court fees, conveyancing, accounting, etc.
• Estate duty: 20% on the dutiable estate above R3.5m (or R7m if a surviving spouse inherits, due to the Section 4(q) deduction), and 25% on amounts above R30m. This duty has to be paid within one year of death, or 30 days after the SARS assessment and is often another large bill that doesn’t have instant liquidity.
• CGT on deemed disposal: death triggers a deemed sale of all assets; gains above the R300,000 death exclusion and R40,000 annual exclusion are taxed at the individual’s marginal rate (80% inclusion rate)

Who gets paid first?

1.  Funeral costs. These rank first as a matter of public policy and humanity —reasonable funeral expenses are paid before any creditor can claim.

2. Executor’s remuneration and administration costs The executor’s fee (3.5% + VAT), Master’s fees, conveyancing costs, and other winding-up expenses come next. The executor has a lien over estate assets for these costs. (In other words, first dibs!)

3.  Secured creditors: Creditors holding security over specific assets — typically the bondholder over immovable property or a bank with a notarial bond over movables. They may be paid from the proceeds of the secured asset, if there is insufficient liquidity elsewhere (like life cover or investments) to settle the debt. A decent executor will confer with the family before this sort of decision is made.

4.  Preferent (preferred) creditors. These rank ahead of general creditors by statute. In a deceased estate, the most significant are:

• SARS — income tax, VAT, and estate duty all rank as preferent claims under the Insolvency Act (which applies by analogy to insolvent estates) and the Tax Administration Act
• Employee claims (wages, leave pay) — if the deceased ran a business
• Landlord’s claims, in limited circumstances

5.  Concurrent (unsecured) creditors General creditors — credit cards, personal loans, trade creditors, medical bills — all rank equally (“pari passu”) and share pro rata if assets are insufficient to pay all of them in full.

6.  Heirs and legatees. Only after all debts, taxes, and costs are settled can the remaining estate be distributed. Within this tier, there is a further order:

• Legatees (specific bequests — “I leave my watch to X”) are paid first from the relevant assets
• Heirs (residual beneficiaries — “the rest to Y”) receive whatever remains after specific bequests

No inheritance can be paid to any beneficiary until SARS issues a deceased estate compliance letter (tax clearance). The Master will not authorise distribution without it.

This is the last in this ‘Legacy Series’, which will be converted into an ebook shortly. I have a simple, fill-in-yourself pro forma estate plan available on request – but please note, this does not constitute advice and is for educational purposes only. A professional estate plan is complicated and needs to be done by a qualified and experienced financial planner. 

Articles and Blogs:

Dos and Don’ts of Wills and Estate Planning NEW
Planning your legacy, starting with your will NEW
Holiday checklist
Next year – Action Plan
Next year – Vision, Mission etc
Medical Risk Mitigation
Next Year – Consolidation
Abdication or diversification?
Carbo-loading your retirement
Spoiled for choice 
Who needs a plan anyway  
8 questions you need to ask about retirement  
What to do when interest rates drop 
How to survive volatility in your investments 
What to do when interest rates drop 
Difficult Financial Conversations 
Financial Implications of Longevity 
Kick Start Your Own Retirement Plan
You matter more than your kids in retirement  
To catch a falling knife 
Income at retirement 
2025 Budget 
Apportioning blame for your financial state 
Tempering fear and greed  
New Year’s resolutions over? Try a Wealth Bingo Card instead.
Wills and Estate Planning (comprehensive 3 in one post) 
 Pre-retirement – The make-or-break moments 
Some unconventional thoughts on wealth and risk management 
Wealth creation is a balancing act over time 
Wealth traps waiting for unsuspecting entrepreneurs 
Two Pot pension system demystified 

Cobie Legrange and Dawn Ridler, 
Rexsolom Invest, Licensed FSP 45521.
Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za
Website: rexsolom.co.za, wealthecology.co.za