Important things to know about liquidity in your estate
Last updated on 13th May, 2022 at 02:27 pm
Death is not something any of us like to dwell on, but being financially prepared for it should be a priority. This includes ensuring your estate is wound up as smoothly as possible without a harsh financial impact for your loved ones. The key to this is liquidity. Find out what liquidity in your estate means, and how it plays a role in your estate planning with this guide.
Liquidity in a nutshell
Liquidity refers to the assets in your estate that are easily accessible to your executor in cash form, or, if needed in an emergency, could be converted into cash at short notice.
Examples of assets that provide cash liquidity include a cheque or current account with a positive balance, or a savings account. Fixed deposits are an option, too, because these can be matured on death, says David Thomson, senior legal advisor at Sanlam Trust. It also wouldn’t be much of a hassle or take too long to withdraw from a money market unit trust, and if you have a 32-day notice account, this could be accessed, says Thomson.
Cash can also include life insurance. It pays out outside your estate if you have nominated a living beneficiary, and normally clears in the nominated beneficiaries’ accounts within between 48 and 72 hours. In the absence of a beneficiary, it pays to your estate. Read on to learn more about how life insurance can be integrated into your estate planning to ensure liquidity upon your death.
Assets that take some time to liquidate, so would not be recommended for improving your estate’s liquidity, include shares on the stock market and vehicles. Then, the assets that could become a more serious obstacle to your liquidity are fixed, tangible assets like property and businesses. This is because, if your executor needed cash in an emergency, they would have to sell these assets off to generate cash from the sale, and this could take some time including obtaining consent from the heirs and the Master of the High Court. “Also worth bearing in mind is that when assets are sold to cover estate debt, they are usually sold way under their market-related price, as the money is needed urgently,” says Nicki Blignaut, senior financial planner and principal at 2one2 BlueStar, authorised by Sanlam.
Why everyone’s estate liquidity is NB
Liquidity in an estate is important, as it allows you to settle debts and other liabilities you may have in your name. This is just as important after your passing; your liabilities don’t disappear, and your dependants’ needs that would’ve been catered for by your income don’t die with you. Added to this are the costs attached to death – like estate duty, executor’s fees and transfer fees of assets. Read more about these and other unexpected costs related to death, here.
Sadly, a fairly large portion of deceased estates aren’t liquid, making it a headache for the appointed executor to tie up loose ends. According to Thomson, around 45% of estates handled by Sanlam Trust fall into this category.
With thorough planning, you can prevent liquidity shortfalls when you die, and make sure your loved ones’ needs are taken care of by ensuring your estate is liquid. The fewer cash flow issues your estate has, the less frustration and hassle your executor and loved ones will have to deal with.
The costs that need covering
When you pass away, there are obvious and not-so obvious debts that need to be settled so that your estate can be wound up and life can continue with some semblance of normality for those you leave behind. Here are some of the liabilities Thomson says can be claimed from your estate:
- Outstanding doctor’s bills, namely those your medical aid didn’t cover.
- Tax debts “You may not have submitted tax returns for years, and SARS might take a judgement against your estate. This often blindsides people because they don’t necessarily know their spouse’s tax affairs.”
- Business debt “You might’ve signed surety for your company, and if the company has fallen into arrears, the creditor can claim the full amount owed directly from your estate on your death.”
- Ex-spouse maintenance “There could be a maintenance claim from an ex-spouse if it wasn’t honoured before your passing, and for minor children if you have any from previous relationships.”
- Surviving spouse maintenance “If you haven’t left enough to your spouse in your will, they would have a claim in terms of the Maintenance of Surviving Spouses Act.”
- Other court judgements
Don’t forget the ongoing expenses paid to service providers that you would need to continue to honour. These are things like:
- Short-term insurance premiums
- Satellite TV premiums
- Bond payments
- Vehicle finance instalments etc.
“These still must be made, otherwise you become in breach of contract,” cautions Thomson.
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Executorship and your liquidity
“After your passing, an executor of your estate is appointed, and they receive an official letter of executorship signed and authorised by the Master of the High Court. That letter is recognised by financial institutions as stating who the designated executor of your estate is,” explains Thomson.
A certified copy of this letter needs to be sent to all banks and other financial institutions with whom you have unit trusts, stock market shares, life insurance, current and savings accounts etc, notifying them of your passing. By this time your executor should’ve set up an estate bank account for your estate, which is where any money stored in your name with financial institutions would be transferred. Any estate debts that need to be settled are paid from this account.
“If there isn’t enough money in that account to settle your debts, then you have a liquidity shortfall,” says Thomson. “Your executor can’t move forward with winding up the estate until they have secured enough cash to pay your creditors and estate expenses.”
Regardless of your marital status or whether you are a parent or guardian or not, making provisions for the expenses linked to your death is the smart, responsible thing to do.
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If you have no dependants
If you don’t have a partner or children who would stand to inherit your estate, there are still fees attached to the movement of assets and changes in ownership of things you leave behind.
“Someone is going to be appointed to wind up your estate, and fees would need to be paid,” says Thomson. “For example, if you own a car or a house and die without a will (intestate), those assets would potentially be handed down to your parents or siblings. If your estate doesn’t have liquidity, it would be frozen, and whatever your surviving relatives stand to inherit may not reach them because those assets would have to be liquidated to settle your estate costs.
These costs can run into the thousands. “The executor’s fees are calculated as 3.5% of your assets, but can be negotiated,” shares Thomson. Then there’s also the master’s fee, which goes to the Master of the High Court for the letter of executorship and the other services they provide, and that can be a maximum of R7 000. There’s also estate duty, Capital Gains Tax and conveyancing fees – which is paid for the transfer of property from your estate to that of your beneficiaries once you’ve passed on. “Estate duty is 20% of the entire nett value of your assets [up to the first R30 million; 25% on the dutiable value of the estate applies above R30 million], so you could end up owing SARS millions,” says Blignaut.
These costs come out of your estate, so even just having enough cash on hand to cover these is vital. And if you don’t? “If there’s money for a property owed to the bank, for example, unless you have liquidity to pay that mortgage, the bank would attach the house by court order and sell it in execution, and your heirs would get a lot less than they thought they would,” says Thomson.
If you have dependants
If you have a life insurance policy on which your spouse or other dependants is the nominated beneficiary, the benefit would be paid out within a matter of days if a valid claim is submitted, which would allow them to meet their immediate cash needs soon after your passing, and use however they like.
However, if your estate isn’t in order, your executor may be in the uncomfortable position weeks later of having to approach your policy’s beneficiaries and ask for money to be paid into the estate to create liquidity. And if the beneficiaries can’t, the executor would have to sell off property and other valuables to free up cash.
“If you’ve taken out credit life insurance on a property or vehicle financing agreement, you have peace of mind that when these debts fall due on your death, your policy pays out to the financial institution to settle the amount owing on those agreements,” says Thomson. “If you don’t have this cover in place, the reality is that these assets could be repossessed by the financial institution to recover any loss they would incur for instalments not paid.”
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How to prepare your estate
Understanding the financial demands on your estate after your passing is the first step in planning adequately for them. It’s why Thomson and Blignaut recommend undergoing an estate audit as part of your estate planning with a qualified financial planner, so that you have a clear idea of whether you have enough cash to cover costs, and if you don’t, which solutions are best suited to your financial plan. Book a meeting with one today, here.
Life cover and your estate
“The easiest way to make enough cash available to wind up your estate is to take out a life policy and make the beneficiary the estate,” says Blignaut. This can give you peace of mind that all your estate expenses are covered upon your passing, and that your dependants are well taken care of. “Bear in mind that if you are working for a company and have a pension or retirement fund, generally those pay to your dependants. So they stand to receive that benefit,” says Thomson. If your dependants’ cash flow will be eased by retirement fund or employee risk benefit scheme pay-outs, you might want to consider discretionary cover just for your estate.
Reality Health and Reality Plus members can save up to 30% on their life cover premiums thanks to their Sanlam Reality membership. Find out more here.
Finally, Blignaut suggests ensuring your family knows who your financial planner is so that they know who to call in the event of your passing.
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