Wealth Advisory Newsletter

WHY LIQUIDITY IS ESSENTIAL WHEN WE DIE

During our lifetime, we accumulate wealth in the form of various assets, e.g. property, motor vehicles, businesses and investments. In accruing wealth, it is vital to ensure that sufficient liquidity is available so that assets are efficiently transferred to our heirs. And, once transferred, beneficiaries must be able to afford the preservation costs of the inherited assets.

Anticipate delays

The lockdown, which started in late March 2020 resulted in the backlog of many of the service providers. Executors of estates are reliant on these service providers during the administration of a deceased estate. Two years later and executors are still finding delays with various service providers.

When people die, there is still a legal obligation to settle debt. Debit orders to creditors, like mortgage bond repayments, still go off a deceased’s bank account until the bank freezes the account. Creditors often charge interest on arrears until the account is settled. This impacts negatively on heirs, as their inheritances are reduced.

It takes longer than was previously the case for an executor to receive the Letters of Executorship to start the administration of an estate. You, therefore, need to ensure that surviving family members received sufficient cash to enable them to honour the payment of debit orders until the executor can settle the full balance owing to creditors. This will prevent interest on arrears from being charged.

Of late, we find that it generally takes an executor longer to administer a deceased estate. Inheritances are only paid to beneficiaries once all the necessary formalities are adhered to, which can sometimes take between two to three years to finalise. The cost of living is exceptionally high and mourning the loss of a loved one is a traumatising and emotional experience. These aspects should not be compounded by loved ones not having sufficient cash to continue paying their day-to-day living expenses while the estate is being administered. Cost of food, school and university fees, travel and medical expenses are some of the necessary costs our loved ones need to settle. Therefore, it is important to ensure that surviving family members have sufficient cash during the administration period until they receive their final inheritance – and beyond.

Additional considerations 

If you are running a business, be it a company, partnership or CC, salaries and wages still need to be paid, business debt must be catered for and there should be a good succession plan in place to prevent difficulties faced in the administration of the estate. A good succession plan will ensure that the business does not depreciate in value and that the wheels continue to run efficiently. Beneficiaries can either take over the business with ease or receive the value for what it was worth. 

Liquidity is needed if you are married out of community of property with accrual, especially where there may be a potential accrual claim resting against your estate in favour of your spouse. Calculating the accrual is often overlooked. Should insufficient cash be available to satisfy the accrual, an executor may have to sell assets in the estate to cater to the shortfall. This could be to the detriment of beneficiaries, especially in cases where assets are specially bequeathed, and the inheritance must be abated.

Maintenance obligations do not come to an end when you die. A cash sum must be made available to the beneficiary either in or outside the estate to fulfil such obligations. A consideration could be a separate life cover policy or a suitable investment to satisfy these obligations. This will prevent claims against the estate, which could lead to a sale of certain assets and a long delay in the administration process.

Costs to consider

Apart from having sufficient liquidity in your estate for the executor to settle your personal debt owing to creditors, you must cater for costs of administering your estate, such as:

• Executor fees
• Master’s fees
• Conveyancing fees and related property transfer costs like clearance certificates
• Advertisement fees
• Bond cancellation fees
• Short-term insurance premiums to cover assets during the administration
• Bank charges
• Appraisement costs
• Postage and petties
• Tax e.g., income tax, capital gains tax and estate duty 

Having a financial adviser and using specialists in estate planning will ensure that all the consequences of your death have been addressed, adequate liquidity introduced to prevent cash shortfalls and a proper plan in place so that your legacy remains intact for your beneficiaries.

By Jocelyn K. Manda

PPS Fiduciary Specialist at PPS Fiduciary Services

Disclaimer: Kindly note that this does not constitute financial advice; the information provided is purely informational. In terms of the Financial Advisory and Intermediary Services Act an FSP should not provide advice to investors without an appropriate risk analysis and thorough examination of a client’s particular financial situation. The information, opinions and communication from the PPS Group or any of its subsidiaries, whether written, oral or implied are expressed in good faith and not intended as investment advice, neither do they constitute an offer or solicitation in any manner. Professional Provident Society Insurance Company Limited is a licensed insurer conducting life insurance business, a licensed controlling company and an authorised financial services provider.