OPINION: Cash shortfalls add to beneficiaries’ grief
Having sufficient liquidity in an estate refers to the level of cash available to cover the administration costs, such as the fees for the executor and the Master of the High Court, as well as any outstanding liabilities from debts raised by the deceased. Individuals often mistakenly think that liquidity and solvency are the same thing.
Solvency is where the total assets in your estate exceed the total liabilities. Insolvency, therefore, is where - after the sale of every last asset - there is still not enough money to settle the liabilities in your estate. This also means that there will be nothing left for your heirs to inherit.
Liquidity, on the other hand, refers to whether an estate has sufficient cash - or assets which can easily be reduced to cash - to settle the liabilities and immediate costs, without the need to sell assets that would otherwise be left as an inheritance for beneficiaries.
Therefore, it is not enough simply to have a solvent estate. An estate with a cash shortfall lacks liquidity and can cause unforeseen negative complications in the administration and winding up of an estate.
In the event of a cash shortfall, the executor may either request that the beneficiaries settle this themselves - if they wish to maintain specific bequeathed assets - or he or she may be forced to sell non-liquid assets, such as houses or other properties to raise the money.
Consideration must be given to the deceased’s liabilities - including mortgages, vehicle finance and other personal loans - because these do not dissolve upon death. These must be settled by the executor, from the estate, after which the distribution of the balance of assets may take place.
The house, car and furniture are, in many cases, the only significant assets in an estate. If an executor has to dispose of these to make up the cash shortfall, this can be particularly tragic for the surviving spouse and children, who may be left without a car to drive or even a roof over their heads.
Families should familiarise themselves with the assets in their joint or separate estates to reduce the risk of a cash shortfall.
It is a good idea to do an inventory of the amount of money available in savings or investment accounts, as well as being aware of which life policies will be payable to the estate to alleviate any cash shortfalls. Life insurance policy proceeds can be used to settle liquidity shortfalls within the estate. Professional financial planners often make use of these inexpensive policies to ensure that families maintain assets upon death. Furthermore, ascertain which liabilities will be covered by credit life insurance and will be settled from such insurance, rather than being a liability against the estate.
An estate is liable for an income tax assessment until the date of death, and, depending on the assets and liabilities in the estate, these may attract estate duty and capital gains tax as well.
Completing an estate plan with your financial adviser is the best way of ensuring that your loved ones will be left cared for and receive all the assets you intend them to have.
Trisca Hattingh is the head of fiduciary services at GTC.