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The employees are then displaced and the business is obliged to offer them retrenchment packages; settle leave pay and vested bonuses. Because employee and creditors' claims get preferential treatment, the business owner's heirs will only receive what is left after all such claims have been paid.

Thomson explains that, apart from these claims, outstanding SARS payments (including VAT); UIF payments and retirement fund contributions collected from staff are also settled first and all this may erode the cash which the business owner left behind.

"There is also a problem of lease agreements, hire- purchase contracts and timeshares. These still need to be paid until the contracts expire. While in the case of lease agreements, the landlord must endeavour to limit the losses and find a new tenant, this may take months. Until then, rent will be claimed against the estate as provided in the lease."

Thomson explains that while a business owner may have multi-million Rands worth of assets when he dies, it doesn't mean much if the value cannot easily be converted to cash. The lack of liquidity means executors of the estate may have to sell items at a giveaway price or delay the process of winding up of the estate if the heirs do not want to sell some assets.

"Unfortunately the best price you can charge when winding up a cash-strapped estate is what a cash-paying buyer is willing to pay. When heirs don't accept that price and the estate cannot be wound up in reasonable time, interest-bearing debts like SARS payments accumulate and they eventually claim a greater share of the deceased estate when the process is finalised."

To circumvent the problems created by cash shortfalls and delays in the winding-up of their estate, business owners are encouraged to have some personal investments outside of the business. In this context, Thomson says a retirement annuity (RA) is a very sensible option since its proceeds are protected from creditors. If you are a sole proprietor and need to spread your personal investments beyond the RA, he explains that you may need to consider setting up a trust given that, in the eyes of the law, a sole proprietor and his business are one entity. A business owner can then donate up to R100 000 per year to the trust. Anything above R100 000 p.a. will attract donations tax of 20%.

A method of dealing with potential cash challenges is to take out a life policy specifically to cover business debts, says Thomson. The business owner can specify in his will that the policy must be payable to his estate and he may even stipulate which debts are to be covered by that policy.

Some estate planning companies like Sanlam Trust will discount the executor's fee substantially if a business owner has made such an arrangement.

"This can truly make a difference between winding up the estate in 4 months or 4 years," says Thomson.

He concludes that business owners need to enlist the help of both financial and legal advisers when drawing up a will in order to ensure that all potential problems are addressed.

Sanlam Life Insurance is a licensed financial service provider.
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