A Will can tell your family where your assets should go. But it doesn’t necessarily tell them how those assets will get there – or what it may cost along the way.
For many South Africans, creating a Will feels like the final step in getting their affairs in order. You decide who should inherit, appoint an executor and sign the document. Then you put it somewhere safe and assume the job is done.
But a Will is only one part of an estate plan.
As financial advisers, we often see families focus on what they own and who should inherit it, without considering what happens between those two points. When an estate is wound up, there may be executor fees, taxes, debts, property-related costs and other administration expenses to settle before beneficiaries receive what is left.
There is another issue that can be even more difficult: having enough liquidity to pay those costs without putting pressure on the family or forcing assets to be sold at the wrong time.
This is why estate planning is about more than having a valid Will. It is about making sure the different parts of your financial plan work together when your family needs them to.
What does it actually cost to wind up an estate?
The cost of administering an estate will depend on the individual circumstances of the deceased estate. However, there are several costs that families should understand when planning for the future.
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Executor’s fees
The executor is responsible for administering the estate, including dealing with creditors, financial institutions, the Master of the High Court, SARS and the distribution of assets.
Executor remuneration is generally capped at:
- Up to 3.5% of the gross value of estate assets plus VAT this is negotiable.
Importantly, the calculation is based on the gross value of the assets rather than simply the amount beneficiaries ultimately receive.
For a R5 million estate, executor’s fees alone can therefore represent a significant cost.
The important question is not simply “Who will be my executor?”
It is also:
“Have I planned for the cost of administering my estate?”
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Estate duty
Estate duty may reduce the value passed to beneficiaries.
The first R3.5 million of an estate currently qualifies for an abatement, with estate duty charged at 20% on dutiable amounts up to R30 million and 25% on amounts above R30 million.
Estate duty is not something that only families with vast fortunes should think about. The value of a home, investment portfolio, business interests and certain policies can build over a lifetime.
That means your potential estate duty exposure can change as your wealth changes.
Estate planning should therefore be reviewed as your financial circumstances evolve – not only when you first sign your Will.
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Capital Gains Tax
Death can also have tax consequences.
Certain assets may trigger Capital Gains Tax (CGT) consequences on death, which can reduce the value ultimately available to beneficiaries.
This is one reason why looking only at the value of your assets can give you an incomplete picture of what your family may actually receive.
A R10 million estate, for example, does not necessarily mean your family will have R10 million available to distribute.
The value of an estate and the value that ultimately reaches beneficiaries are not always the same thing.
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Property and transfer costs
For many South Africans, the family home is one of their largest assets.
Where immovable property forms part of an estate, there may be conveyancing and other costs associated with transferring ownership to beneficiaries.
These costs need to be considered alongside the other expenses associated with winding up the estate.
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Outstanding debts and liabilities
Before beneficiaries receive their inheritance, debts and liabilities generally need to be dealt with by the executor.
These may include:
- Home loans
- Vehicle finance
- Personal loans
- Credit facilities
- Outstanding taxes
- Medical accounts
- Other creditor claims
This can have a significant impact on the amount ultimately available to your beneficiaries.
It also raises an important estate planning question:
If your family had to settle these obligations tomorrow, where would the money come from?
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The smaller costs that add up
There are also administration costs that can be easy to overlook because they may not appear significant individually.
These can include:
- Advertising costs
- Master’s Office fees
- Bank charges
- Valuation costs
- Tax compliance costs
- Other professional and administrative expenses
Individually, these costs may seem manageable. Across the entire estate administration process, however, they can add up.
The hidden cost most families overlook: liquidity
Perhaps the biggest estate planning issue is not the amount your estate may owe.
It is whether there will be enough cash available to pay those obligations.
An estate can be wealthy on paper but short of cash.
Imagine that most of your wealth is tied up in your family home, investments or a business. Those assets may have substantial value, but they cannot necessarily be used immediately to pay estate expenses.
Your family may still need to cover executor fees, taxes, debts and other costs while the estate is being administered.
If there is not enough liquidity available, assets may need to be sold to raise the cash required.
That is where a carefully considered estate plan becomes important.
The question is not only, “What will my family inherit?”
It is also, “Will my family have access to enough money to get through the process?”
Your Will is important. Your estate plan is bigger.
A Will remains an important part of making your wishes known. But it should not be viewed in isolation.
A comprehensive estate plan considers how your Will fits together with the rest of your financial affairs.
This can include:
- Keeping your Will up to date
- Reviewing beneficiary nominations
- Planning for estate liquidity
- Understanding potential estate duty exposure
- Considering tax consequences
- Accounting for administration costs
- Reviewing how assets are structured
- Making sure your executor appointment remains appropriate
It is also important to remember that not every asset is necessarily dealt with through your Will.
For example, retirement fund death benefits are subject to Section 37C of the Pension Funds Act and are dealt with by the fund trustees rather than simply being distributed according to your Will.
Beneficiary nominations on certain policies may also operate outside the estate.
This is why updating your Will without reviewing the rest of your estate plan may leave gaps between what you intend to happen and what actually happens.
Estate planning is about more than leaving wealth behind
None of us can predict exactly when our estate will need to be administered.
But we can plan for what happens when that day comes.
Good estate planning does not mean that every cost can be avoided. It means understanding the potential costs, planning for them and making sure your family is not left to solve financial problems while they are also dealing with loss.
For your family, the greatest hidden cost may not be an executor’s fee, estate duty or an administration charge.
It may be the cost of not having a plan.
Is your estate plan still fit for your life?
Your Will may have been drafted years ago. Since then, you may have bought property, built an investment portfolio, started a business, had children, changed your beneficiaries or experienced other changes in your financial circumstances.
Your estate plan should evolve with you.
Speak to your financial adviser to make sure your Will is up to date, your beneficiary nominations are aligned with your wishes and your estate plan is on track to provide for the people who matter most.
Adviceworx is a juristic representative of Adviceworx Advisory (FSP 33002) and an authorised Financial Services Provider (FSP 44914).
This article is for information purposes only and does not constitute financial advice. Readers should obtain appropriate financial advice tailored to their individual circumstances before making any financial decisions.
