In order to ensure that there are no shortfalls or unforeseen complications, your estate plan should include careful calculations to determine the death costs in your estate. As estate planning is a highly specialised area, it is preferable that this exercise is undertaken together with an expert in this field. Over and above ensuring your estate’s solvency, it is also important to determine whether it has sufficient liquidity to settle its liabilities, taxes, and other financial commitments that may arise as a result of your passing.
Estate solvency means that the value of all your estate’s assets is greater than the total combined liabilities in your estate. In the event that your deceased estate is found to be insolvent, the Master may direct that the estate is wound up in terms of the Insolvency Act. On the other hand, estate liquidity means that you have sufficient cash, or assets that can easily be converted to cash, to cover the liabilities and administration costs in the estate.
If there is insufficient liquidity, the executor may need to realise certain assets in the estate in order to meet its obligations, and this can give rise to complications and unintended consequences. As such, estate planning is designed, amongst others, to ensure that your estate is both solvent and liquid, and can be wound up in terms of your last wishes.
In developing your estate plan, the following costs should be taken into account:
Important to bear in mind is that your tax liabilities follow you to the grave, and one of the executor’s first jobs is to ensure that Sars is paid what is owing. There are effectively two tax assessments that your executor will need to carry out. The ‘pre-date of death’ assessment must include all income and deductions applicable to the deceased up to the date of death, and the ‘post-date of death’ assessment which will include dividends, interest and rental income which accrued during the winding-up process up until the Master has formally approved the liquidation and distribution account.
When preparing your estate plan, it is essential to determine whether your estate is liable for estate duty. Estate duty is tax paid on the dutiable estate of the deceased person and is charged at a rate of 20% on the first R30 million, and at 25% on anything over R30 million. The dutiable estate includes all your assets and liabilities, less any allowable deductions. The first R3.5 million of the value of your estate is not subject to tax. If you are the first-dying spouse, you can roll over this abatement to your surviving spouse who will then have a R7 million estate duty abatement on their death.
Where you have bequeathed assets to your surviving spouse, no estate duty will be charged on the asset. Remember, funds held in retirement annuities, pension funds, provident funds, or living annuities do not form part of your deceased estate, assuming the contributions to these funds qualified as a tax deduction.
(ii) Claims against the estate
Paying all the debts and liabilities in your estate is one of the executor’s first jobs, keeping in mind that settling the estate’s debt takes place before any heirs or beneficiaries receive their inheritance. As soon as the executor has been officially appointed, they must open an estate late bank account and place a Section 29 advertisement in the local newspaper and the Government Gazette. The purpose of this advert is to notify debtors and creditors of the deceased estate, granting them a 30-day period to submit any claims against the estate. Once the L&D Account has been signed off, the executor is required to place a Section 35 advert in the local newspaper and the Government Gazette, and the account will lie open for inspection at the Magistrate’s Court for a period of 21 days. This process provides the opportunity for any objections, together with reasons, to be lodged with the Master. Once all the creditors have been paid, the Master will need to determine whether there will be a cash shortfall in your estate, following which they may need to sell certain assets in the estate to meet its financial obligations – and this can lead to your heirs not receiving the inheritance you intended for them.
(ii) Administration costs
There are a number of administration costs that may apply to your deceased estate which include:
Funeral and burial costs: The cost of your funeral and burial are borne from your deceased estate, and it is important to ensure that your loved ones have immediate access to cash. Funerals can cost anywhere between R10 000 and R50 000, depending on your wishes and those of your family members, although with current Covid-19 restrictions, funerals tend to be smaller, more cost-effective events.
Advertising costs: Your executor will need to advertise for creditors in terms of Section 29 of the Administration of Estates Act, as well as your L&D account in terms of Section 35, and the costs of these adverts will depend on the publication used.
Postage and petties: These are likely to cost between R300 and R500.
Estate late bank account: Banks generally charge in the region of R600 to open an estate late bank account.
Professional fees: The executor of your estate may need to use professionals to assist with the winding up of your estate, and these costs will be paid by the estate. For example, if you are married with the accrual system, the executor may need to employ the services of an account to determine the accrual.
Estate agent’s commission
Maintenance of assets: Any costs incurred in respect of maintaining an asset in the estate will be covered by the estate.
Valuation and appraisal costs: Where the Master insists that an asset in the estate is valued by a sworn appraiser, these costs – together with the appraiser’s travelling costs – will be paid from the estate.
Executor’s fees: The maximum amount that an executor can charge is 3.5% of the gross value of the assets in the estate, plus VAT at 15%. In addition to this, your executor is entitled to charge 6% on all income collected on behalf of your estate from the date of death until final winding up, and this includes rental, interest, dividend, trading or farming income.
Master’s fees: If an estate has a value between R250 000 and R400 000, the Master’s fee will be in the amount of R600. Thereafter, Master’s fees are calculated on a sliding scale up to a maximum of R7 000.
Bond cancellation costs: If your executor is required to cancel a bond over the fixed property, your estate will be liable for the bond cancellation costs.
Transfer costs: If immovable property in your estate is transferred to an heir, your estate will be required to pay the transfer costs in accordance with a sliding scale determined by the Law Society. Note that no transfer duty is payable where the fixed property is transferred to an heir by either testate or intestate succession.
Rates clearance costs: Where your estate owns fixed property, your estate will be required to pay rates and taxes to the municipality five months in advance.
As your personal and financial circumstances change over time, it is important to ensure that your estate plan remains updated. Ideally, your estate plan should be reviewed as part of your annual financial planning review.