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Death Has an Expensive Price Tag

By David Thomson, 4 March 2020

Death can be expensive and none of us wants to see our loved ones saddled with serious cash shortfalls when they have to wind up our estates.

Consider that the average cost of winding up an estate is 3.5% of the gross value of the assets, plus VAT (15%). On a R1 million estate, that’s R35 000, plus R5 250 VAT. So, over R40 000 gone, straight off the bat. The executor of the estate is also entitled to a fee on all income earned post the date of death. It’s clear that proper estate planning is key to ensure our beneficiaries don’t bear the brunt of too little cash in our estate.

Sadly, this is often exactly the reality for family members who stay behind, as people tend to seriously underestimate death-related costs, with significant consequences. Sanlam Trust found that over 46% of the deceased estates it administers have insufficient cash to cover all debts, costs, cash bequests and taxes payable during one’s lifetime, and income tax, capital gains tax and estate duty upon death. This can have serious consequences for loved ones left behind.

Fees Payable to the Master of the High Court

David Thomson, Senior Legal Adviser for Sanlam Trust, says we should all become more familiar with the costs involved at death. It’s important to understand that costs are classified as a) administration costs, which accrue as a result of the death and are mostly paid in cash, and b) claims against the estate – this means the costs the deceased was liable for at the time of death. Tax is the exception to this.

Here are eleven costs you probably never knew would be due – the Master’s fees payable to the Master of the High Court:

  1. For estates with a value between R250 000 and R400 000: R600. Fees escalate as the value of the estate increases, to a maximum of R7 000.
  2. Administration charges (the executor’s remuneration): 4.025% of the estate value
  3. Valuation costs of assets for estate duty purposes: R2 000 to R5 000
  4. Advertising costs (advertisements for calling on creditors and giving notice that the liquidation and distribution account is open for inspection): R850
  5. Costs for provision of security to the Master (a security bond protects an estate from any negligent act from the executor): 0.05% plus the VAT of the asset value
  6. Estate bank account charges: R600
  7. Transfer costs of fixed property to an heir (determined by a sliding scale issued by the Law Society): R29 000 on a property worth R1 million
  8. Cancellation costs of bonds registered over fixed property in the estate: R3 500
  9. Rates and taxes payable to the City Council with the transfer of fixed property – five months in advance
  10. Postage: R260
  11. Funeral costs: A funeral can cost anything from R6 000 to R50 000 or more

Administration of the Deceased Estate

Thomson says there should be enough cash in an estate to help loved ones cover three to six months’ rates and contractual commitments such as rental payments, mortgage bond repayments, medical aid premiums etc. There may also be capital gains tax to contend with. Capital gains tax is levied on any capital gain (profit) made on the disposal (whether by sale, donation or expropriation) of an asset (on death we are deemed to have disposed of all our assets). At its maximum, 18% capital gains tax would be levied. Then there’s the estate duty to think about. This is the tax paid on the deceased’s dutiable estate (all the individual’s assets and life insurance policies minus their liabilities and allowable deductions and exemptions). Duty of 20% is charged on the first R30 million, and 25% on anything above this. Unless these taxes are paid to SARS, no heir can receive their inheritance.

The executor has a duty to determine the financial position of the estate and decide if there’s enough cash to cover all the administration and debts. If not, the executor and heirs need to assess whether there are sufficient assets to sell in order to settle these expenses. The law is quite clear that if a shortfall exists, the executor has to sell the assets of the estate to cover it. Should heirs not cooperate, then the executor must follow a process set out in section 47 of the Administration of Estates Act and obtain the consent of the Master of the High Court for the sale of immovable property. A certificate authorising the sale in terms of section (42(2)) is also required. Alternatively, the heirs may choose to pay the cash shortfall themselves in order to retain the assets.

It’s important to note that all liabilities must be paid up in full to the creditor – by the estate. For example, in the case of an unpaid vehicle loan, the bank/creditor will issue a summons for repossession of the vehicle and payment of the debt, plus, they can reclaim their legal fees and costs of collection from the estate. A creditor may – in exceptional circumstances – agree to renegotiate the credit terms with the estate and/or the heirs.

Normally, a deceased estate is administered in terms of section 34 of the Administration of Estates Act. However, if an estate is insolvent, the creditors may decide to surrender the estate formally and then it will be administered in terms of the Insolvency Act.

In Conclusion

Thomson says proper estate planning is a significant act of love. “Ask your financial adviser to help draw up an estate plan for you. One or more life insurance policies can significantly contribute to ensuring sufficient cash flow in an estate. If you have maintenance commitments to your child(ren) and/or former spouse, you should ensure your life insurance portfolio provides for that in the future. Be sure to mention in your will that the specific policy is to be used for the maintenance claim. Always be aware of your obligations towards your spouse.

A top tip is not to bequeath all life policies to beneficiaries, but to make at least one payable to the estate to secure the discounted 1.5% executor’s fee and provide much-needed liquidity. Another tip is to use an estate liquidity calculator, to see if you have any shortfalls, so you can work alongside your financial adviser to ensure you make adequate provision for your surviving loved ones.”

Sanlam Life Insurance is a licensed financial service provider.
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