A valid Will is not always enough

By Jane Black (née Rushton) | Director

Many people assume that if they have a valid Will in place, their estate planning is complete. In reality, a Will is only one part of the broader estate planning process.

A Will may be legally enforceable and carefully drafted, but that does not necessarily mean the estate will be simple to administer. One of the most common difficulties encountered in administering deceased estates is not the wording of the Will itself, but rather a lack of liquidity in the estate.

Estate planning is therefore not only about deciding who inherits what. It is also about ensuring there will be enough cash available in the estate to give practical effect to those wishes.

What is estate liquidity?

Estate liquidity refers to the cash available in a deceased estate to settle liabilities, taxes and administration expenses. A person may own valuable assets such as property, business interests, investment portfolios or vehicles, while having very little accessible cash on hand. This can place significant pressure on both the executor and the deceased’s family.

An estate may need to cover a range of expenses, including, inter alia, estate duty; income tax liabilities (both pre-death and post-death); capital gains tax consequences triggered by death; conveyancing and transfer costs; outstanding debts such as loans, credit cards, mortgage bonds or vehicle finance; executor’s fees; maintenance claims and other administration expenses and liabilities.

Where there is insufficient liquidity in the estate, the executor may need to sell assets in order to raise cash to settle these obligations. This can become particularly difficult where the asset involved is a family home, a farm, a business interest or another asset that the deceased specifically intended to preserve for a beneficiary.

‘Asset-rich’ does not necessarily equal estate liquidity

Liquidity issues often arise where a person’s wealth is tied up in assets that are valuable on paper but not easily converted into cash.

Even where a Will clearly states who should inherit a particular asset, the practical reality is that assets sometimes need to be sold simply to allow the estate to meet its obligations. In those circumstances, the executor may have limited room to preserve that asset for the intended beneficiary.

In some cases, beneficiaries may elect to contribute funds to the estate in order to cover a liquidity shortfall. For example, a beneficiary who wishes to retain a family property or investment portfolio may opt to pay the necessary shortfall into the estate rather than allow that particular asset to be sold. While this can provide a practical solution, it is not always financially possible and often creates additional pressure and difficult decisions for families during an already emotional time.

That is why estate planning should not only focus on the wording of the Will. It should also consider whether the estate will have sufficient liquidity to ensure that the deceased’s wishes can realistically and efficiently be carried out without unnecessary complications or forced asset sales.

Estate Duty must also be considered

Estate duty is another important part of the liquidity calculation, as this can often be one of the largest costs in an estate. In South Africa, estate duty is levied at 20% on the first R30 million of the dutiable value of an estate and 25% on the dutiable value above R30 million.

Although not every estate will attract estate duty, where it does apply the estate still requires sufficient liquidity to settle the liability. It is not uncommon for families to underestimate the extent to which estate duty and related taxes may impact the estate’s available cash flow.

Review the Plan before the family has to rely on it

A useful estate planning review should consider more than whether the Will is valid and stored safely. It should involve asking practical questions such as:

• What assets fall into the dutiable estate?
• Which assets are intended for specific beneficiaries?
• Should an asset be left as a specific bequest, or form part of the residue to avoid it being ringfenced?
• What debts, taxes and administration costs may need to be paid?
• Will there be enough cash available to pay those amounts?
• What happens to a business, farm or property if the executor needs cash?
• Will a surviving spouse or dependant have access to sufficient funds during the administration process?
• Is the nominated executor suitable for the nature and complexity of the estate?

These questions are especially important after major life events, including marriage, divorce, the birth of a child, the purchase of property, the start or sale of a business, retirement or the death of a spouse or close family member.

A Will should be legal, clear and workable

A valid Will is essential, but it is not the full estate plan. The more important question is whether the Will, the assets, the liabilities, the family circumstances and the estate liquidity all work together in a practical and sustainable way.

Where they do not, the family may be left with a legally valid document that is difficult to implement in practice. A proper estate planning review can help identify these potential issues early and allow practical steps to be taken before they become problems for the executor and the family.

At Fairbridges we assist clients with Wills, estate planning and deceased estate administration. If your Will has not been reviewed recently, please speak to our team about whether your estate plan is not only valid, but also practical and workable in reality.