It costs how much “to die”? The costs involved in administering a deceased estate
22 Apr 2021
What sounds like the title of another James Bond follow up movie to No Time to Die, is in fact a very real consideration and a very real concern which deserves discussion and understanding.
It costs money to die.
Immediately following a person’s death, the process of winding up his/her deceased estate starts (regardless of whether he/she passes away with a Will or Intestate). But this is not as easy or as cheap as we may think….
As a reminder – a deceased estate refers to the money and/or property that an individual leaves behind when he/she passes. An estate must then be administered and distributed in terms of the deceased’s will or the Intestate Succession Act 81 of 1987.
The winding up of a deceased estate can be very overwhelming for the family of the deceased, especially as they go through their grieving. It is a complex and lengthy process that can take a long time to complete and will include several (sometimes hidden) costs.
Estate planning is a challenging task and, even with meticulous planning (by professionals such as Benaters), your properly architected estate can be undone if the estate does not have sufficient liquidity to satisfy the compulsory administration costs and liabilities due in the event of death.
But before we get into the costs involved with the winding up process, we thought it would be prudent to give a quick overview of what the actual winding up process involves.
Appointment of the Executor
Having an experienced Executor who is familiar with the mechanisms and procedures of winding up deceased estates is to the benefit of the family and beneficiaries. Think of it as your shield against the complexities and intricacies that make up a deceased estate.
The Executor is normally nominated in the will and then appointed by the Master of the High Court to undertake his/her duties. It is the Executor’s responsibility to report the death to SARS, pay any tax or capital gains tax and calculate any estate duty owing.
The Executor’s fee is calculated at 3.5% of the estate’s assets (excluding VAT).
After registering the deceased estate, the Master of the High Court will issue a Letter of Executorship which effectively authorises the Executor to represent the deceased estate. The Executor has authority to open an estate late bank account, notify third parties of the death, collect all assets, advertise for creditors and settle liabilities (all discussed below).
Advertise for creditors
Once an Executor is officially appointed, an estate late bank account must be opened. The Executor must then place a Section 29 advertisement in the local newspaper and the Government Gazette regarding the deceased estate.
The purpose of this advert is to notify debtors and creditors of the deceased estate, granting them a 30-day period to submit any claims against the estate.
Prepare the liquidation and distribution account
After the 30-day period for the advertisement has elapsed and all claims have been lodged, it is the Executor’s function to prepare a Liquidation and Distribution Account (L&D Account). The L&D Account reflects all the assets and liabilities of the estate and determines its solvency (discussed below).
If there is a will, the Executor will use the L&D Account to determine how the assets of the estate must be distributed. In the absence of a will, the assets will be distributed in accordance with the Intestate Succession Act.
It is at this stage that the Executor will pay all estate duty tax, personal income tax (which is levied on the income that the deceased person received before their death) for the deceased’s final tax year as well as capital gains tax on the estate, where applicable. Please refer to our article Death and Taxes for more info around the various inheritance taxes and income taxes that are payable on a deceased estate.
Once the L&D Account has been finalised it is lodged with the Master of the High Court, together with all supporting documentation (including the will) to allow for queries. Anything pertaining to the L&D Account can be queried via a query sheet and the Executor is obliged to provide answers to the Master of the High Court regarding such queries.
Once the Master is satisfied, he/she will sign off the L&D Account.
Advertise Liquidation and Distribution Account
Once the L&D Account has been signed off by the Master of the High Court, the Executor is required to place a Section 35 advert in the local newspaper and the Government Gazette. The L&D Account will then lie open for inspection at the Magistrate’s Court and the Master’s Office. This process provides the opportunity for any objections, together with reasons, to be lodged with the Master of the High Court. If no objections are lodged, the court will issue a certificate of no objection. This certificate must then be lodged at the Master’s Office in order to grant the Executor the authority to distribute the assets.
Once the Executor has the authority to distribute the assets (according to the will or according to the Intestate Succession Act), he/she can begin to distribute the assets as per the L&D Account.
During this process, assets are either awarded to the heirs (for example, property is transferred into the heir’s name) or property is sold and the amount received from the sale of the property is paid out in accordance with the will.
Once the heirs have received their inheritance, they are required to sign an acquittance as verification of receipt.
Sign off and close
The final step in the process is for the Executor to provide the Master of the High Court with proof that the estate has been liquidated in accordance with the will (or according to the Intestate Succession Act).
To do this, the Master of the High Court must be provided with copies of the acquittances, proof that creditors were paid and that property was duly transferred. Once he/she is satisfied, the Master of the High Court will issue a filing slip and formally close the estate.
The Executor must retain all records pertaining to the estate for the prescribed period.
As you can see from the above, this winding up process can take a long time and often incurs a number of costs. So be prepared.
There are certain assets that are not included in the Estate.
Certain assets can be distributed to the beneficiaries independently and include:
- Life assurance benefits – if beneficiaries have been nominated in a life assurance policy, the proceeds of that policy are not included in the estate (although it is important to note that such proceeds may still incur estate duty tax) but are paid out directly to the beneficiaries. Such policies are the ideal vehicles for providing cash for dependents while the estate is being wound up. Where the assets under life policies are included in the estate (in other words, no beneficiaries are named), they count in the calculation of the Executor’s fee.
- Retirement assets – compulsory retirement assets are excluded from the estate. When it comes to pension funds, it is important to note that the assets are not necessarily distributed according to the wishes of the deceased fund member as expressed in a will or on the pension fund beneficiary nomination form. The trustees of a pension fund are obliged under the Pension Fund Act 24 of 1956 to distribute the assets to a member’s dependents, including spouses, biological, step and legally adopted children and anyone proven to be dependent on the deceased for maintenance/financial support, or legally liable for maintenance/financial support (e.g. in terms of divorce agreements and maintenance orders, including customary and religious unions, civil marriages and civil partnerships) and
- Assets held in trust – assets held in a living intervivos trust are not included in the estate.
But death is costly
None of us wants to see our loved ones burdened by serious cash shortfalls during the winding up of our deceased estate.
So it is important to remember that having sufficient liquidity is crucial during this winding up process.
What sufficient liquidity means for a deceased estate is having a level of cash available to cover the administration costs, such as the fees for the Executor and Master of the High Court, as well as any outstanding liabilities from debts raised by the deceased.
This applies regardless of the perceived size of a deceased estate (whether large or small). And this is where many individuals mistakenly think that liquidity and solvency are the same thing. They are not. It is at this point of confusion where cash shortfalls have become a frequent occurrence during the winding up of deceased estates.
So, what is the difference?
Solvency is where the total assets in your estate exceed the total liabilities. Solvency therefore means that after the sale of every remaining asset, there is still enough money to settle all liabilities.
Liquidity refers to whether an estate has sufficient cash, or assets which can easily be reduced to cash, to settle the liabilities and immediate costs without the need to sell assets that would otherwise be left as an inheritance for beneficiaries.
As is evident from the above, it is not enough to just have a solvent estate. Most of the time, an estate with a cash shortfall lacks liquidity and can cause unforeseen negative complications in the administration and winding up of an estate. In the event of a cash shortfall, the Executor may either request that the beneficiaries settle the amount themselves or they may be forced to sell non-liquid assets, such as houses or other properties to raise the money.
And neither one of these situations is desirable for either the beneficiary or according to the deceased’s last wishes.
What are the costs?
If one considers that the average cost of winding up an estate is 3.5% of the gross value of the assets, plus VAT at 15%, it can be cause for concern. For example, on a R1 million estate, that’s R35 000, plus R5 250 VAT. So, over R40 000 deducted straight off the bat.
In addition, the Executor of the estate is also entitled to a fee on all income earned post the date of death. It is also worth remembering that an estate is liable for income tax assessment until the date of death and depending on the assets and liabilities in the estate – these may attract estate duty and capital gains tax as well. This was discussed in our article Death and Taxes.
People tend to seriously underestimate death-related costs. But, it is our aim to prevent this, so here is a summary:
Master’s fees payable to the Master of the High Court
For estates with a value between R250 000 – R400 000 = R600
Fees escalate as value of the estate increases, to a maximum of R7000.
Executor’s remuneration, of which the maximum tariff is determined from time to time in the regulations to the Administration of Estates Act 66 of 1965. The current maximum tariff excluding VAT is 3.5% on the gross value of the estate assets, including on the gross value of a community of property estate (excluding life insurance policies and retirement fund benefits payable directly to beneficiaries) and 6% of all income (e.g. rentals, interest and dividends) which the Executor collects on behalf of the estate from the date of the testator’s death to the date of final distribution of the estate.
Valuation costs of assets which have to be valued for estate purposes
The Master of the High Court may insist that the assets of the estate be valued by a sworn appraiser (who must have a good knowledge of the assets for which he/she is appointed) and for this, the sworn appraiser is entitled to a fee (calculated according to a sliding scale). The sworn appraiser is also entitled to levy travel charges, which are also calculated on a scale determined from time to time.
The Administration of Estates Act stipulates that the Executor must place the following advertisements:
- Calling upon creditors to prove their debts against the estate.
- Giving notice that the Liquidation and Distribution Account is open for inspection for a given time at a certain venue.
- Both advertisements must appear in one or more local newspapers published in the area where the deceased ordinarily lived, as well as in the Government Gazette. If the deceased lived in another district within 12 months prior to his or her death, the advertisement must also appear in one or more newspapers in that district.
These costs will vary depending on the publication and where they are published.
Costs for the provision of security to the Master of the High Court
In terms of the Administration of Estates Act, only certain Executors are exempt from providing security to the Master.
If a nominated Executor does not qualify for this exemption, the Master of the High Court will insist that the Executor provide the necessary security for the value of the estate before the Executor’s appointment is confirmed. The security must be in the form of a Bond of Security, issued by a short-term insurance company.
The current annual rate for this amounts to 0,684% on the value of the security (which will be aligned with the gross value of the estate), with a minimum annual premium of R300.
There are also some other charges, which will vary according to value of property or type of funeral/burial costs, such as:
- Estate bank account bank charges.
- Transfer costs of fixed property.
- Cancellation costs of bonds registered over fixed property in the estate.
- Funeral costs (funeral and burial or cremation costs form part of the claims against the estate and are payable from the funds of the estate).
Don’t forget, cash for loved ones’ living expenses!
Remember, assets are frozen when the winding up of an estate begins and this can have serious implications for dependents.
A spouse married in community of property will have no access to funds in the combined estate until the Executor is sure that the estate is solvent. It may therefore take some time before that spouse can access any cash.
To avoid this, we suggest that you:
- Set up a living trust – any assets transferred into the trust fall outside the estate.
- Take out a life assurance policy in favour of your spouse or other dependents – such policies pay out directly to the beneficiaries named in the policies, often within days of the insurance company receiving the necessary information.
- Transfer a sum of money to your spouse or dependents if death is foreseeable because of ill-health or frailty.
None of the above is a subject we are excited to discuss. But this is not the time to underestimate the value of estate planning, regardless of how insignificant you may think your estate value is. The opposite is far more accurate.
While Your Will is Yours to Make, it is crucial that you discuss your estate planning process with a professional who is able to plan your estate according to your exact and final wishes. The process of planning your estate, with its values, possible deductions and exclusions of various taxes, is complex and intricate. It is therefore imperative that you consult with a legal advisor and a financial advisor when considering your estate planning process in its entirety.
Get in touch with Benaters today to see how we can support you while you navigate your way through the difficult discussion on the effective planning of your estate.
Article sourced from Benaters.
See also:(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)