The real cost of death and other facts

At times, our beloved planet surprises us with the most amazing fact and statistics. Here are some favorites:

• The average cloud has a weight equal to 100 elephants;
• For every human on earth there is about 1 000 000 million ants,
• Wild plants can consist of up to 0.00001% gold particles, and
• It is estimated that as many as one in four deceased estates in South Africa do not have sufficient cash to pay all death costs and taxes on death when the deceased estate is being administered by the executor. In such scenarios, the executor of the estate will sell assets in order to raise sufficient cash to cover the costs and taxes of the deceased estate.

You will agree that these facts are simply mind-blowing with the last one downright scary. One out of four could be one of your friends or even a family member. It could be you! When last did you do a liquidity test of your “deceased estate” as part of your personal financial plan? You should consider doing this on a regular basis whilst maintaining your financial plan through the ebbs and flows of life’s stages.

The importance of having a last Will and Testament

Ultimately, on death, one of the following scenarios kick in:

• If you choose to ignore the fact that the inevitable will happen, then on death, legislation will determine who stands to inherit from you. The Intestate Succession Act stipulates how your estate will be dissolved and in what percentages. Not ideal. You might even miss the chance to say “Hi!” to your least favorite family member in your Last Will and Testament!
• The alternative is to draw up a Last Will and Testament. A Last Will and Testament will ensure that you have control over what will happen to your assets upon your death. Do you agree? In theory, the answer is yes. When you draw up a Will and nominate your executor, the guardian of your minor children and trustees of your testamentary trust, you, after long deliberation, also determine who will inherit the Lego salt and pepper set that your aunt brought you as a gift from her last visit to Lego World in Denmark. Unfortunately, not all the time:

1. When the executor of your Will is faced with insufficient cash in the administrative process, he or she will sell assets to cover those expenses and taxes that have to be settled as part of the administration of your deceased estate. That may include the Lego salt and pepper set. Unfortunately.

2. No matter how sincere your intent is when drafting your Will, if you draft your will in isolation and not as part of your bigger financial plan, it may turn into a real disaster upon death.

3. DIY Wills is also a danger, if not executed correctly it may be invalid and then your estate planning is back to square one. Never attempt to draft a Will on your own.

Questions when drafting a Last Will and Testament

Google “drafting my own Will” and the questions are endless. Most popular are:

Can I draft my own Will?

Sure, this is an option, but why will you attempt to a DIY with one of the most important documents you will ever sign? You can buy a Will template online, but does it include all the legal jargon to make it a legal document?  Are you sure how to execute the Will in a correct manner to make it a legal and binding document? On a side note, a person whom you gave power of attorney, may not draft a Will on your behalf.

Can my nominated executor also be an heir or beneficiary in my estate?

Yes, your executor may inherit from your estate. The question should rather be: Why must a grieving family member be burdened with the administration of your estate?

How much are executor’s fees?

Executor’s fees as per legislation are 3.5% on the gross value of assets that the executor will include in your Liquidation and Distribution Account. If registered for VAT, that must be added. You are allowed to negotiate this fee upfront with your nominated executor.

What is a Last Will and Testament?

A document that allows you to decide who should be the beneficiaries of your estate once you die. It will help and guide how any property and assets must be distributed in a legal manner. It must also specify any other provisions towards your family and dependents. You must also nominate your executor to prevent any confusion.

What is an executor?

This person or institution will manage the administration and distribution of your estate. The executor becomes legally responsible regarding your estate’s finances. The executor must also make sure that all taxes, debt, and liabilities are settled. Most importantly, the executor must distribute any property and money correctly and in a legal manner. The administration process is complex with many legal requirements. Therefore, make sure you nominate someone who will be able to do what is required.

The stress test and the cost of death

When drawing up your Will, it is important to do a stress test. It simply means doing a dummy execution of your Will and distributing your estate while you are still alive. Pretend you die and test if the execution of your Will is practical and if there is sufficient cash or liquidity to ensure that your executor does not need to sell any assets. Test whether your Will fit into your greater financial plan and personal financial planning goals and whether or not you need to adjust your planning process. The following is an example of the stress test:

• Your only asset is a house worth R5 000 000. You bequeath this property in your Will to your two grown-up children. Is it practical from an administrative point of view? Absolutely yes!
• However, the stress test may indicate that there could be estate duty payable.
• Do not forget about possible capital gains tax as part of the final income tax assessment, the executor’s fees and other administrative costs. What if there is still a small bond that needs to be settled? What about possible fees related to rates and taxes linked to the property?
• A few calculations later and you will realize that death could cost you an estimated half a million rand in this scenario
• Unless your children are willing to pay the cash and costs upfront before the property could be transferred to them, the executor could be forced to sell the property in order to cover these costs and taxes.
• The Last Will and Testament is clearly part of your bigger financial and estate planning goals. If you draw it up in isolation, the cost of death may haunt your grieving family members.