11 Surprising costs that happen after death
Death is a difficult word, and an even more unsettling prospect to consider for yourself. But planning for the time when you pass away could alleviate an enormous amount of anxiety for your loved ones, freeing them to grieve your passing unburdened by financial concerns. Death has a number of sad and surprising costs – here are some worth knowing about, and planning for.
The expense of underestimating costs
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, more than R40 000 gone, straight off the bat. Then there’s the executor fee on income earned post the date of death. With this in mind, proper estate planning is key to ensure your beneficiaries don’t bear the brunt of too little cash in your 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 more than 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.
Budget for these hidden expenses
David Thomson, Certified Financial Planner® and senior legal adviser for Sanlam Trust, says we should all become more familiar with the costs involved. 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. Income tax will, of course, be calculated after death, and any money owing to SARS will be a claim against the estate.
Here are 11 costs you probably never knew would be due:
- Administration charges (the executor’s remuneration): 4.025% of estate value
- Valuation costs of assets for estate duty purposes: R2 000-R 5 000
- Advertising costs (advertisements for calling on creditors and giving notice that the liquidation and distribution account is open for inspection): R850
- Costs for provision of security to the Master (a security bond protects an estate from any negligent act from the executor: 0.05% plus VAT of the asset value).
- The Master’s fees payable to the Master of the High Court. 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.
- Estate bank account charges: R600
- Transfer costs of fixed property to an heir (determined by a sliding scale issued by the Law Society of South Africa): R29 000 on a property worth R 1 million
- Cancellation costs of bonds registered over fixed property in the estate: R3 500
- Rates and taxes payable to the city council with transfer of fixed property – five months in advance
- Postage: R260
- Funeral costs: A funeral can cost anything from R6 000 to R50 000 or more.
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 rent, mortgage bond repayments, medical aid premiums, etc.
Capital gains tax
Capital gains tax is levied on any capital gain (profit) made on the disposal (whether by sale, donation or expropriation) of an asset. Note that at death, we are deemed to have disposed of all our assets. At its maximum, 18% capital gains tax would be levied.
This is the tax paid on the deceased’s dutiable estate – all of the deceased’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. Note that unless these taxes are paid to the SARS, no heir can receive their inheritance.
What if the costs can’t be covered in cash?
The executor has a duty to determine the financial position of the estate and decide whether 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 clear that if a shortfall exists, the executor has to sell the assets of the estate to cover it. If heirs don’t cooperate, 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 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 summons for repossession of the vehicle and payment of the debt; in addition, 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.
Get the right cover to help your loved ones
Thomson says proper estate planning is a significant act of love. “Ask your financial planner to help draw up an estate plan for you. One or more life insurance policies can significantly contribute to ensure 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.” More on this, here.
Always be aware of your obligations to your spouse. If you fail to do so, the law will catch up with your estate – as set out in the Maintenance of Surviving Spouses Act.
“A tip is not to bequeath all life policies to beneficiaries, but to make at least one payable to the estate, in order to pay estate expenses, to secure the discounted 1.5% executor’s fee (offered by Sanlam Trust) and provide much-needed liquidity. Also consider using an estate liquidity calculator, to see if you have any shortfalls, so you can work alongside your financial planner to ensure you make adequate provision for your surviving loved ones.”
As a Reality Plus or Health member, you can get up to 30% discount on your life insurance and other risk cover premiums, depending on your tier status.
Keeping your estate plan up to date is just one of the ways to help secure a future for your children, particularly in times of uncertainty. Here are other ways to set them up for success.
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Unsure how to plan your estate so the right people get what they’re due when you pass on? A financial planner is qualified to help you settle the admin of estate planning and advise on the right risk cover for you, so your loved ones aren’t saddled with expenses in the event of your death. Book a phone meeting with one now.
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