Discovery Life unpacks the hidden costs of winding up a deceased estate

“Nothing is certain except death and taxes”. There is a reason why that famous 1789 quote by Benjamin Franklin still rings true more than 200 years later.

Death and taxes are life’s inevitabilities, yet many people find themselves woefully unprepared for something that involves both certainties – winding up a deceased estate.

Conveyancers’ bills, executor’s fees, and taxes due to the South African Revenue Services (SARS) when winding up a deceased estate can see beneficiaries come out financially short. Depending on the size and complexity of the estate, it can take a few months to years for the process to reach completion.

What makes this scenario even more difficult is that only 30% of South Africans have a Will in place.

The liquidity limbo

The root cause of difficulties is usually liquidity – in other words, how much cash is at hand to cover the costs associated with a deceased estate. These costs include everything from estate duty owed to SARS to debt the deceased owes to the bank. If there is a cash shortfall, the executor must sell off the deceased’s non-liquid assets, like houses and cars, to make up the cash quickly. This means the beneficiaries inherit less than anticipated or, depending on the degree of the shortfall, nothing at all.

“If the estate doesn’t have the liquidity, then the executor will sell off assets, sometimes below their market values as there’s a rush to create liquidity. If there’s no way an executor can raise sufficient liquidity, then they will normally resign, and the estate will stay in limbo,” cautions Discovery Life’s Head of Legal Marketing, Harry Joffe.

What taxes are involved when winding up a deceased estate?

For an estate worth up to R30 million, the executor must pay an estate duty of 20% to SARS. Anything above R30 million incurs a 25% tax. “However, there is an exemption against estate duty: a R3,5 million general rebate – [or reduction on tax payable] – on anything bequeathed to a spouse. But when the remaining spouse passes away, that estate duty will have to be paid on assets in their estate above the rebate,” says Joffe.

“Another exemption is related to capital gains tax,” adds Joffe. “It is paid at a maximum rate of 18%, but only for anything above a rebate for the deceased estate of R300 000. There is also rollover relief [the tax is only paid when the surviving spouse sells assets] for any asset bequeathed to a spouse, like shares or investments,” explains Joffe.

But he says there is a caveat to that: Because the deceased is deemed to have sold off all their assets at the date of death, this means that when the surviving spouse passes, their estate is liable for the capital gains tax on those assets.

There are other ‘hidden’ taxes. For instance, if another beneficiary who is not the deceased’s spouse receives a policy payout as a beneficiary, that is also subject to estate duty at 20/25% in the deceased estate. Estate duty must be paid on some assets held by the deceased in other countries, at the rate in that country, which tax will then be a credit back in SA. Unless the country in question doesn’t levy estate duty, like Mauritius, then the full duty on that asset will be paid in South Africa.

What costs are involved when winding up a deceased estate?

“The main costs are transfer costs – what the conveyancer charges to transfer the property to a beneficiary, and executor fees – which is a maximum rate of 3.5% plus VAT on any assets handled by the executor,” says Joffe. Other costs to consider are Master’s fees, advertisement of the liquidation and distribution account, setting up a late estate bank account and provision for bank charges, bond cancellation costs, clearance certificate fees from the city council or municipality, and ongoing bills like medical aid and water and lights (keeping in mind that the deceased’s bank account is frozen).

Even though just over 40% of South Africans have funeral cover, only one in 10 South African consumers has life insurance. If the deceased’s estate has a cash shortfall, the funeral and immediate costs may be taken care of, but there are no backup funds available to pay for winding up the estate itself.

“The perfect solution for liquidity is an insurance policy that provides indemnity for executors’, trustee and conveyancing fees and covers other costs through a liquidity benefit,” says Joffe.

He says this is the reason why Discovery designed its Estate Preserver benefit. Costs that the Discovery Estate Preserver indemnifies include executor’s fees, costs of paying a professional trustee to run a testamentary trust for clients who’ve left instruction in their Will to create this and property conveyancing fees. In addition clients receive the Liquidity Benefit, which pays a lump sum to help settle other immediate costs on death and the Contribution Protector Benefit, which disburses six payments on a monthly basis to assist with various monthly expenses, including insurance.

“Having an estate duty benefit or ‘last survivor benefit’ is also recommended, as this provides liquidity in the second deceased spouse’s estate, because if the first spouse leaves everything to the second spouse, there’s no estate duty or capital gains tax on the first passing away, but once the second passes away there’s estate duty and capital gains tax applicable,” says Joffe.

Winding up a deceased estate comes with many hidden costs – often to the unintended detriment of those left behind. With many South Africans lacking proper estate planning, cash shortfalls force the sale of non-liquid assets, reducing inheritances, or even leaving estates in limbo. Mitigating the taxes and costs involved through insurance policies that provide liquidity benefits and cover the associated taxes and fees ensures a smoother and quicker winding up process for everyone involved, and preserves the wealth passed on to loved ones.

ENDS