Written by Gina Lazarides
• Cash bequests:
Any specific bequests of cash amounts to someone in your Will may cause liquidity problems in your estate. If there is not enough cash or liquid assets in the estate to pay the expenses, liabilities, and the cash bequests, assets may have to be sold by the executor, and then not necessarily at the best price.
• Liabilities in your estate:
After your death, all your liabilities have to be paid by your estate, including medical bills, funeral costs, income taxes up to date of death, as well as capital gains tax and estate duties (if applicable). Any loans that have been made to you from a trust or other entity have to be repaid at your death by your estate. Trustees often make loans to individual trust beneficiaries to enable them to externalise funds as part of their foreign investment allowances. Such loans may build up in value over the years and when they have become exceptionally large amounts it can cause unintended liquidity issues in an estate.
• Taxes to be paid after death:
In South Africa, inheritance taxes are paid by the estate of a person who has died in the form of estate duty. Estate duty is levied in South Africa on the dutiable amount (after deductions) of the estate, comprising of property and deemed property, wherever situated in the world, of a person who is ordinarily resident in South Africa at the date of his/her death. The first R3 500 000 (section 4A abatement) of a person’s estate is exempt from estate duty in SA, and thereafter estate duty is levied at 20% up to an asset value of R30 million in your estate, and at a rate of 25% on values above. Death is a deemed disposal for capital gains tax purposes and capital gains tax will thus also be payable on assets in a deceased estate. If one has not provided enough liquidity in the estate to pay all the necessary taxes, this could cause unintended consequences such as assets having to be sold, or funds having to be brought back from offshore to SA.
• Marital status
In South Africa, the accrual system now automatically applies to all marriages out of community of property, unless it is specifically excluded in the antenuptial contract. Under the accrual system, each spouse is generally entitled to share in the growth of the two estates at time of death or divorce. At the dissolution of the marriage, by way of divorce or death, of one or both spouses, the spouse or estate which has the smaller accrual acquires a claim against the other spouse or his/her estate for an amount equal to half the difference between the accrual of the respective estates of the spouses. This could become problematic in the case of the spouse with the larger accrual dying first and his/her estate having to pay an accrual claim to the surviving spouse. In some cases, this could mean that bequests to beneficiaries in terms of the Will do not end up in their hands, as the accrual claim must be settled first.
Conclusion
It is important to consider the above aspects when analyzing the potential liquidity situation in your estate. Not having enough liquidity in your estate can lead to a number of unintended consequences. The executor of your estate may be forced to liquidate assets which you never intended to be liquidated or which may have to be liquidated at a price that is not ideal, may have to bring offshore assets back onshore, ask the residuary heir to pay an amount equal to the cash shortage into the estate or the estate could be factually insolvent. While a person’s estate is still being wound up, most of the assets will be frozen and thus inaccessible to the beneficiaries. Trust assets do not form part of a deceased estate and are not frozen. An advantage of having a family trust of which your family are beneficiaries is that the trustees can provide for the expenses and needs of beneficiaries while a person’s estate is still under administration.
Should you have any questions or if you require any assistance regarding the above please contact Tamryn de Villiers tamryn@fidelisvox.co.za.
• Cash bequests:
Any specific bequests of cash amounts to someone in your Will may cause liquidity problems in your estate. If there is not enough cash or liquid assets in the estate to pay the expenses, liabilities, and the cash bequests, assets may have to be sold by the executor, and then not necessarily at the best price.
• Liabilities in your estate:
After your death, all your liabilities have to be paid by your estate, including medical bills, funeral costs, income taxes up to date of death, as well as capital gains tax and estate duties (if applicable). Any loans that have been made to you from a trust or other entity have to be repaid at your death by your estate. Trustees often make loans to individual trust beneficiaries to enable them to externalise funds as part of their foreign investment allowances. Such loans may build up in value over the years and when they have become exceptionally large amounts it can cause unintended liquidity issues in an estate.
• Taxes to be paid after death:
In South Africa, inheritance taxes are paid by the estate of a person who has died in the form of estate duty. Estate duty is levied in South Africa on the dutiable amount (after deductions) of the estate, comprising of property and deemed property, wherever situated in the world, of a person who is ordinarily resident in South Africa at the date of his/her death. The first R3 500 000 (section 4A abatement) of a person’s estate is exempt from estate duty in SA, and thereafter estate duty is levied at 20% up to an asset value of R30 million in your estate, and at a rate of 25% on values above. Death is a deemed disposal for capital gains tax purposes and capital gains tax will thus also be payable on assets in a deceased estate. If one has not provided enough liquidity in the estate to pay all the necessary taxes, this could cause unintended consequences such as assets having to be sold, or funds having to be brought back from offshore to SA.
• Marital status
In South Africa, the accrual system now automatically applies to all marriages out of community of property, unless it is specifically excluded in the antenuptial contract. Under the accrual system, each spouse is generally entitled to share in the growth of the two estates at time of death or divorce. At the dissolution of the marriage, by way of divorce or death, of one or both spouses, the spouse or estate which has the smaller accrual acquires a claim against the other spouse or his/her estate for an amount equal to half the difference between the accrual of the respective estates of the spouses. This could become problematic in the case of the spouse with the larger accrual dying first and his/her estate having to pay an accrual claim to the surviving spouse. In some cases, this could mean that bequests to beneficiaries in terms of the Will do not end up in their hands, as the accrual claim must be settled first.
Conclusion
It is important to consider the above aspects when analyzing the potential liquidity situation in your estate. Not having enough liquidity in your estate can lead to a number of unintended consequences. The executor of your estate may be forced to liquidate assets which you never intended to be liquidated or which may have to be liquidated at a price that is not ideal, may have to bring offshore assets back onshore, ask the residuary heir to pay an amount equal to the cash shortage into the estate or the estate could be factually insolvent. While a person’s estate is still being wound up, most of the assets will be frozen and thus inaccessible to the beneficiaries. Trust assets do not form part of a deceased estate and are not frozen. An advantage of having a family trust of which your family are beneficiaries is that the trustees can provide for the expenses and needs of beneficiaries while a person’s estate is still under administration.
Should you have any questions or if you require any assistance regarding the above please contact Tamryn de Villiers tamryn@fidelisvox.co.za.