Estate planning: Calculating estate liquidity

Many people tend to underestimate the death-related costs in their estates, the result being that an enormous number of deceased estates have liquidity shortfalls. Not to be confused with estate solvency, estate liquidity means ensuring that there is sufficient cash in your estate to cover all debts and costs, bequests and maintenance obligations. If there is not enough cash to meet all its obligations, the executor is entitled to realise assets in your estate to meet its obligations, and this can leave your heirs in a precarious financial position. Let’s have a closer look at calculating estate liquidity.

Make an inventory of your assets

The first step in determining your estate liquidity is to make a complete inventory of your assets. Bear in mind that, if you are married in community of property, only 50% of the joint estate is yours to bequeath. If you are married out of community of property without the accrual, everything that is owned by you can be incorporated into your estate plan, but bear in mind that your surviving spouse and children may have a claim for maintenance against your estate. Where you are married with the accrual system, any accrual claim that you have against your spouse will be considered deemed property in your estate in the event of death. Life insurance policies also fall within the category of deemed property as they only pay out and become property in your estate after your death. When listing your assets, be sure to include all tangible property, such as immoveable and moveable property, vehicles, household effects, artwork, jewellery and so on, as well as intangible assets such as shares and unit trusts.

Calculate your liabilities

The second step is to calculate all liabilities in your estate, bearing in mind that Sars has first claim to your estate and that no heir can receive their inheritance until all tax has been paid. Your Sars liability will include all tax owing as at the date of your death, as well as any tax owing from the date of death to signed off liquidation and distribution account.

Other costs that will need to be accounted for include any pre-death medical costs that were not covered by your medical aid and/or gap cover, deathbed expenses, the cost of your funeral, cremation, tombstone, memorial service and/or burial. Your deceased estate will also need to pay executor fees which are generally set at 3.5% of the value of your estate, excluding VAT, keeping in mind that the executor is also entitled to a fee on all income earned post the date of death. When calculating executor’s fees, remember that fees are not charged on life assurance policies that are paid to named beneficiaries, nor on the proceeds of retirement funds that are administered by the fund trustees. There are also winding up costs such as bank charges, transfer fees, valuation and advertising costs which must be borne by your estate.

If you are married out of community of property with the accrual system, remember that your surviving spouse has an accrual claim against your deceased estate to the extent that your share is greater than hers, and this must be included in your calculations. Ideally, a joint estate planning exercise should be undertaken where ‘first-dying’ and ‘second-dying’ spouse scenarios are created so that you can plan accordingly.

Your death will be regarded as a capital gains event, which means your estate will be liable to pay CGT on any gains before proceeds can be distributed to your heirs. Taking into account your capital gain exclusion of R300 000 in the year of death, any assets bequeathed to your surviving spouse are also free from CGT, as are any bequests made to approved public benefit organisation. The proceeds of life assurance policies, benefits from retirement funds, and money housed in living annuities are all exempt from capital gains tax.

Determine your estate duty

Having calculated the net value of your estate, the next step is to determine whether your estate will be liable for any estate duty, keeping in mind that you are entitled to a R3.5 million abatement. To the extent that the net value of your estate exceeds R3.5 million, your estate will be liable for estate duty at a rate of 20% up to R30 million, and at a rate of 25% on any amount greater than R35 million.

Determining your estate duty liability means calculating the value of your dutiable estate and taking into account those assets which are exempt from estate duty. These include any assets or bequests to your surviving spouse, bequests to public benefit organisations, and the proceeds of life policies which are payable to your spouse. Any life policies will be included for estate duty calculation purposes. When calculating your estate duty, you will need to include the value of your foreign assets. In the case of foreign assets, be sure to understand the tax regime that applies to the country in which these assets are owned, as you may be liable to pay tax in that country as well, subject to possible double tax agreements.

Another important consideration when making bequests in your Will, is that the value of any assets or bequests made to legatees are included for estate duty purposes. However, estate duty is paid from the residue of your estate – in other words, after your legatees have received their bequests – and this can substantially reduce the inheritance of your heirs.

Work out your liquidity

Now that you have a clear idea of the cash situation in your estate in the event of your death, the next step is to determine whether this cash is sufficient provide your loved ones with sufficient accessible funds to carry them through the winding up process (which could take up to two years or longer in extreme cases), honour any cash bequests made in your Will, and provide your loved ones with income-producing assets to provide for them financially over the longer term. While your estate is being wound up, your loved ones will need to meet any rent or bond payments, honour any contractual commitments, pay medical aid and short-term premiums, and have enough money to cover their day-to-day living costs. If you have any liquidity shortfalls in your estate, you may want to consider using life insurance to contribute to your estate’s liquidity and there are a number of ways of structuring such policies. If you take out a life policy with your estate as the nominated beneficiary, the proceeds of the policy will pay directly into your estate, were they will be subject to the winding up process and subject to executor’s fees. However, should you nominate your spouse and/or dependants as beneficiaries to the policy, the proceeds will be paid to them directly within 48 hours of your death, and will not be subject to executor’s fees. If you have sizeable debt such as a home loan, the bank can hold a security cession on the policy, in which case the proceeds will be paid directly to the financial institution.

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