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  While taxes are usually sharply under the spotlight, the focus of this article is clearly on the administration costs, and not opposed to the tax burden on death. Fair point, though, that taxes also e...  

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How to reduce the costs in an estate

Ensure sufficient cash is available to avoid sale of assets – Fisa.

JOHANNESBURG – The death of a spouse, friend or relative is often an emotional time even before estate matters are addressed.

And truth be told, death can be an expensive and cumbersome affair, particularly if estate planning was neglected, the claims against the estate start accumulating and there isn’t sufficient cash to settle outstanding debts.

People generally underestimate the costs related to death, says Ronel Williams, chairperson of the Fiduciary Institute of Southern African (Fisa). Most individuals have a fairly good grasp of significant expenses like a mortgage bond that would have to be settled, but the smaller fees can also add up.

To avoid a situation where valuable assets have to be sold to settle outstanding debts, it is important to do proper planning and take out life and/or bond insurance to ensure sufficient cash is available, she notes.

Costs

The costs involved in an estate can broadly be classified as administration costs and claims against the estate. The administration costs are incurred after death as a result of the death. Claims against the estate are those the deceased was liable for at the time of death, the notable exception being tax, Williams explains.

Administration costs as well as most claims against the estate will generally need to be paid in cash, although there are exceptions, for example the bond on the property. If the bank that holds the bond is satisfied and the heir to the property agrees to it, the bank may replace the heir as the new debtor.

Williams says quite often estates are solvent, but there is insufficient cash to settle administration costs and claims against the estate. In the event of a cash shortfall the executor will approach the heirs to the balance of the estate to see if they would be willing to pay the required cash into the estate to avoid the sale of assets.

If the heirs are not willing to do this, the executor may have no choice but to sell estate assets to raise the necessary cash.

“This is far from ideal as the executor may be forced to sell a valuable asset to generate a small amount of cash.”

If there is a bond on the property and not sufficient cash in the estate, it is not a good idea to leave the property to someone specific as the costs of the estate would have to be settled from the residue. Where a particular item is bequeathed to a beneficiary, the person would normally receive it free from any liabilities. This could result in a situation where the beneficiaries of the residue of the estate may be asked to pay cash into the estate even though they wouldn’t receive any benefit from the property, Williams says.

The most significant administration costs are generally the executor’s and conveyancing fees.

If the will does not explicitly specify the executor’s remuneration, it will be calculated according to a prescribed tariff, currently 3.5% of the gross value of the assets subject to a minimum remuneration of R350. The executor is also entitled to a fee on all income earned after the date of death, currently 6%. If the executor is a VAT vendor, another 14% must be added.

Assuming an estate value of R2 million comprising of a fixed property of R1 million, shares, furniture, vehicles and cash, the executor’s fee at a tariff of 3.5% would amount to R70 000 (plus VAT if the executor is a VAT vendor). Conveyancing fees will be an estimated R18 000 plus VAT. Depending on the situation, funeral costs may be another R20 000, while other fees (Master’s Office fees, advertising costs, mortgage bond cancellation and tax fees) can easily add another R10 000. By law advertisements have to be placed in a local newspaper and the Government Gazette, with estimated costs of between R400 and R700 and R40 respectively. Master’s fees are payable to the South African Revenue Service (Sars) in all estates where an executor is appointed with a gross value of R15 000 or more. The maximum fee is R600.

Where applicable mortgage bond cancellation costs, appraisement costs, costs of realisation of assets, transfer costs of fixed property or shares, bank charges, maintenance of assets and tax fees will also have to be paid. The executor is also allowed to claim an amount for postage and sundry costs, while funeral expenses, short-term insurance, maintenance of assets and the cost of a duplicate motor vehicle registration certificate may also have to be taken into account.

Luckily, there are ways to reduce the costs involved

Williams says the first step is to try and negotiate the executor’s fee with the appointed executor when the will is drafted. The fee could then be stipulated in the will or the executor could give a written undertaking confirming the agreed fee. But even if the deceased did not negotiate it at the time of drafting, the family or heirs can still approach the nominated executor and negotiate a competitive fee when they report the estate to the executor.

“Depending on who the executor is and what the composition of your estate is, you can probably negotiate up to a 50% discount.”

The composition of assets will generally be a good indicator of the amount of work that needs to be done and the executor will quote a fee against this background. The sale of a fixed property and business or offshore interests may complicate the process of winding up the estate.

If the surviving spouse is the sole heir, and/or there are no business interests and sufficient cash is available to cover the costs, the executor will generally offer a larger discount. Ultimately, the executor is responsible for signing off the liquidation and distribution account, confirming that all the costs are correct and that it will be settled.

Unfortunately, most of the smaller administration costs will have to be paid, with limited scope for negotiation, Williams says.

Costs of security can be avoided completely by exempting the nominated executor from lodging the bond of security in the will, Williams says.

This article was brought to you by the Fiduciary Institute of Southern Africa.

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A glaring omission in this article is the issue of capital gains tax in a deceased estate. The deeming provisions of the act can have a major impact on the liquidity of a deceased estate and consideration needs to be given to the new ( relatively ) section 9HA and section 25.

While taxes are usually sharply under the spotlight, the focus of this article is clearly on the administration costs, and not opposed to the tax burden on death. Fair point, though, that taxes also eat into the cash reserves in a deceased estate.

No one knows the date of their death.

However it is possible for the “future deceased” to do something long term outside of their estate.

What about saving in a tax free account via investments in cash currently earning 8.0% + on fixed deposit? Upon death this can then be liquidated. Cash gives some element of certainty (and so helps with planning) but of course one can go partly into equities too.

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