Not to be confused with estate solvency, estate liquidity means ensuring that there are sufficient liquid assets in your estate to cover all debts, costs, accrual claims, maintenance obligations and bequests. If there is insufficient liquidity in your estate, your executor may be forced to realise assets intended for your heirs and beneficiaries in order to meet your estate’s obligations, and this can have unintended financial consequences for your loved ones. Here’s what to know about estate liquidity in the context of estate planning.
As a first step, you will need to prepare an analysis of the assets in your estate with due consideration given to the nature of your marriage contract. Remember, if you are married in community of property, only 50% of the joint estate is yours. If you are married with the accrual system, you and your spouse will retain separate estates until your marriage dissolves as a result of death or divorce. In the event of your death, the values of your respective estates will be calculated in adherence with the terms set out in your ante-nuptial contract. To the extent that the value of your estate is the larger, your surviving spouse will have a preferent claim against your deceased estate for her share of the accrual. Should your spouse’s estate be greater in value, any accrual claim that you have against your spouse will be considered deemed property in your estate in the event of death. Ideally, when developing your estate plan, ask your financial planner to devise ‘first-dying’ and ‘second-dying’ spouse scenarios so that you fully understand the financial effects of each. If you have life cover in place, note that life insurance policies on your life will be considered deemed property as they only become assets in your estate upon your death. Keep in mind that when listing your assets, you will need to include all tangible property (such as immovable and moveable property, vehicles, household effects, artwork, jewellery, etc) as well as intangible assets such as shares and unit trusts.
In calculating your estate costs and liabilities, keep in mind that SARS has first claim to your estate and that no heir or beneficiary can receive their inheritance until all outstanding taxes have been paid. Your SARS liability will include all tax owing at the date of your death plus any tax owing from the date of death to the final sign-off of your estate’s liquidation and distribution account. It is important to keep in mind that death is a capital gains event and, upon your death, you will be deemed to have disposed of all your assets for an amount equal to the market value of the asset at the date of death. Following the submission of the your pre-death tax, your executor will need to file a final post-death tax assessment in which all CGT payable by your estate must be declared. As our law currently stands, individual taxpayers are provided a once-off CGT exclusion of R300 000 in the year of death, meaning that the first R300 000 of gain will be free from tax. Thereafter, any gains will be included at a rate of 40% and subject to your marginal tax rate. That said, certain assets in Certain assets in a deceased estate are excluded from CGT, including assets accruing to a surviving spouse, most assets for personal use, assets bequeathed to approved Public Benefit Organisations, and the proceeds from life insurance policies.
Other costs you may need to account for include any pre-death medical costs not covered by your healthcare cover, deathbed expenses, plus funeral, burial, tombstone and/or cremation costs. Your estate will also be responsible for paying executor’s fees which are currently prescribed at 3.5% of the value of your estate, excluding VAT, keeping in mind that your executor is also entitled to charge a 6% fee on all income earned after the date of your death. When calculating the executor’s fees in your estate, keep in mind that executor’s fees are not charged on the value of life policies that are paid to names beneficiaries nor on the death benefits in your retirement funds. Other costs that your estate may bear include bank charges, transfer and conveyancing costs, bond cancellation fees, valuation and appraisal fees, advertising costs, and estate agents commission (in the event that fixed property needs to be realised).
Once you’ve calculated the net value of your estate, you will need to determine whether your estate would be liable for estate duty, keeping in mind that individuals are entitled to a R3.5 million estate duty abatement. To the extent that the net value of your estate (including your worldwide assets) 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 R30 million. To determine the dutiable value of your estate, keep in mind that certain assets, such as bequests to your surviving spouse, bequests to PBOs, and the proceeds of life policies payable to your spouse, and business assurance polices, are excluded.
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 that are payable to your spouse. If you own foreign assets, be sure to understand the tax regime applicable to the jurisdiction in which those assets are held and whether a double taxation agreement exists. If you intend making bequests in your will, note that the value of any assets or bequests made to legatees are included for the purpose of calculating estate duty, although estate duty is paid from the residue of your estate, in other words, after your legatees have received their bequests, which can substantially reduce the inheritance received by your heirs.
When considering the liquidity in your estate keep in mind that, depending on the complexity of your estate, the administration process can take up to two years to finalise – and you will no doubt want to ensure that your loved ones have access to cash to tide them through this period. The practical implications of your death may mean that your loved ones will need to continue paying the bond or rent, rates and taxes, medical aid premiums, and other bills while waiting for your estate to be finalised, and there are a number of available mechanisms to help build liquidity into your estate. While in the process of accumulating wealth, life insurance can be used effectively to provide your loved ones with almost immediate access to cash in a tax-efficient manner, so speak to your financial advisor on how best to structure this type of policy.
As is clear from the above, calculating your estate liquidity needs and structuring your estate plan to ensure that there are sufficient liquid assets to cover costs related to your death can be complex, and our advice is to seek guidance from an experienced estate planner.
Have a great day.
Sue
