Let’s be honest, estate planning and the drafting or revision of one’s last will and testament is a daunting task which forces us to think about our own mortality – a thought which we would rather avoid.
However, the death of a loved one is a traumatic and emotionally turbulent burden for any family to bear and is often compounded by the high cost of death. Albeit that our mortality is beyond our control – the cost implication of our death on our loved ones is not - it is something which, through proper estate planning, can be effectively managed.
Costs at death can be widely grouped into two categories – administration costs, which are usually incurred after death and claims against the estate, which usually consist of those liabilities for which the deceased was liable as at date of death.
Administration costs include executor’s fees, costs of security, conveyancing fees (transfer and bond cancellation costs), advertising costs, master’s fees, appraisement costs, bank charges, accountant’s fees and the cost of realising or liquidating assets.
Executor’s fees are, in absence of the will stating otherwise, currently 3.5% of the gross estate value. If the executor is VAT registered, VAT at 14% will also be charged. Executors are furthermore entitled to 6% on income earned in the estate after death.
Claims against the estate vary depending on the deceased’s specific circumstances but will generally include financial liabilities such as credit cards, overdraft facilities, mortgage bonds, personal loans, vehicle and asset finance and store cards. Other claims may include maintenance and accrual claims, funeral expenses, medical costs and rates and taxes payable in advance with the transfer of property.
Credit life insurance, funeral policies and life insurance may all serve as possibly simple and affordable relief to a cash deficit in an estate.
The entirely amended section 25 and new section 9HA of the Income Tax Act No. 58 of 1962 which impact directly on the taxation of deceased persons and deceased estates makes tax liability more present and real than ever before. The addition of section 7C to the Income Tax Act has also resulted in many having to revise their wills and the use of trusts as an estate planning tool and of course, the risk of estate duty liability remains ever present.
All of the above administration costs and claims need to be paid in cash. A solvent estate is not necessarily a liquid estate. When there is a cash shortfall which the heirs are not able to supplement, the executor may be forced to sell estate assets – of which many are often high value assets being realised to supplement a much smaller cash deficit. The realisation of these assets may often also give rise to a capital gains tax implication which in effect will increase the estate’s tax liability and cash deficit. Needless to say, the cost of realising these assets, for example auctioneer or estate agent fees are not to be forgotten.
The good news is that through efficient estate planning, one is able to circumvent some and substantially reduce many of these costs and ensure sufficient provision for those which are inevitable.
Unfortunately many people underestimate the cost of dying and fail to observe proper estate planning practices. It’s never too early or too late to begin estate planning. By reviewing your will and estate plan on a regular basis you could not only save time and money but also, spare your loved ones the burden of unnecessarily high estate costs and the emotional trauma associated therewith.
Should you require any assistance or further information, kindly contact one of our Estate Planning specialists at email@example.com or 044 601 9900.
Written by Kelly Fourie-Barnard.