Death is an expensive exercise worth planning for

STEVEN DAVE

Not only should you make sure that your will is up to date, but you should embark on some estate planning to make sure that your will doesn’t end up a hollow document – just words that have no practical effect, or worse, that leave your spouse or child with debt after you die instead of a healthy inheritance.

Dying is a costly exercise. One immediately thinks of potential doctor’s bills and funeral expenses. But the truth is that there are many additional fees and taxes that you probably aren’t aware of. I would like to highlight just one of these other “unknown” liabilities: executor’s fees.

An executor must be appointed to wind up your estate. While you are free to nominate anyone you chose to be the executor, the master will generally grant the appointment only if that person is assisted by a practicing attorney, practicing chartered accountant, a board of executors, or a registered trust-administration company. So, while you may appoint your surviving spouse, the reality is that unless this person is suitably qualified, one of the abovementioned professionals will have to assist in winding up the estate.

The executor is entitled by law to charge up to 3.5% (plus VAT if a VAT vendor) of the gross value of the property in the estate. An agent of the executor is likewise entitled to charge a fee – by agreement normally up to 3.5% plus VAT or a professional fee. If an agent (not the executor) is doing the work then the executor shouldn’t charge a fee, only the agent’s fee should be charged.

Practically speaking, the executor’s fees cannot simply be avoided by appointing a family member or friend. Winding up an estate requires detailed knowledge of the process and is an administratively intensive exercise.

An estate planning exercise should take this fee into account, and make provision for it.

What is “property” in your estate? The simple answer is every single asset held in your name. Your shares, the money in your bank account, your house or houses, your car, and so on. Imagine that you have just purchased a house and the house is bonded, and so at this stage is not even really yours. Should you pass away, not only will the bank be a creditor in your estate (in respect of the outstanding bond), but the executor will also be entitled to his fee of 3.5% on the gross value of the property. Put simply, if you bought the house for R3.5 million (bonded or not), the executor’s fee on this asset alone is R140 875 (including VAT). Where will the money come from to pay this fee?

If you don’t have sufficient cash in your estate to pay the executor’s fee, either your heirs must personally find the money and pay it into the estate, or estate assets will have to be sold to pay the fee. Consider being forced to sell assets in the current economic climate. Will you receive a fair price? If your heirs don’t have the cash and don’t want assets to be sold, they will have to obtain a personal loan to pay the cash required into the estate. Would they qualify for the loan? What interest rate would be levied? This is a situation to be avoided at all costs. If your estate doesn’t have the cash to pay the executor’s fee, life insurance can be taken out to ensure that on death the money required is available.

If you are married in community of property, then the spouses have only one, joint estate. While they may have assets registered in their own names, the reality is that all of the assets, regardless of whose name they may be in, belong to the joint estate not the individual. This means that on the death of one of the spouses, the executor deals with the entire estate. The surviving spouse can’t deal with “her” assets until such time as the executor has unwound the joint estate and allocated her share to her.

The executor is thus entitled to charge a fee based on the gross value of the joint estate, not on only 50% of the estate. Estate planning for each of the spouses must thus take into account the executor’s fee based on the entire estate, and there must be enough cash to pay this fee.

Of course, the question is where will your surviving spouse get the cash to pay the executor’s fee? Will assets have to be sold? The first step is to make sure you know how much the executor’s fee is going to be, the next step is to make provision for it. Possible options would be to have enough savings to pay the fee, or comfort with the fact that certain assets must be sold. The solution that will cause the least disruption is to ensure that you have enough life cover in place in order to provide for the executor’s fee. This will place the least pressure on the surviving spouse.

In my experience, you need not only have a well drafted, valid, and up-to-date will, you absolutely need to be sure that proper estate planning analysis has been done. I have highlighted only one aspect – executor’s fees – but there are other taxes and fees that must also be paid, so it’s imperative that you partner with a financial adviser to ensure that you have a clear picture of the rand amount required to pay all your creditors (including the South African Revenue Service) as well as to pay for the actual winding up and administration of your estate (the executor’s fees). In this way, you can ensure that you achieve your and your family’s financial freedom.

• Steven Dave is an executive financial advisor with Liberty, and holds the CFP designation with the Financial Planning Institute.