Eight ways to lower deceased estate costs

By Malissa Conlin*

Spare a thought, for a second, for your loved ones after you’ve passed on. No-one relishes the thought of the emotional toll, never mind the lengthy admin process of wrapping up your estate.

This topic seems rather morbid, but it’s a reality. And unfortunately, the first dose of reality hits right out the gate. As soon as the bank is told of a death, your accounts are frozen. That means your family will likely have to pay for the funeral themselves and claim the money back from the estate later.

From there, winding up an estate often takes a year or longer. During that time a person called the executor, either the person you named in your will, or someone appointed by the Master of the High Court, takes charge. Their job is to gather information about everything you own, pay what you owe, and only then hand over what’s left to your heirs. And there’s a bill to settle along the way.

What the bill looks like

The costs of winding up the estate are paid from the estate, in cash, before any heir receives a cent.

The executor’s fee: This can be up to 3.5% (plus VAT) of the gross value of your assets. So, if your assets are worth R6 million at the date of your death, the executor fee could be as much as R 210 000.00 plus VAT (R 241 500.00 in total). This is deducted from your estate as an administrative cost. The executor can also charge up to 6% on any income the estate earns after your death, such as interest or rent.

The Master’s fee: The Master of the High Court charges a fee, capped at R7,000.

Running costs: The executor must place notices in the Government Gazette and a local newspaper calling on your creditors to come forward. Further notices must be placed to let interested parties know that the liquidation and distribution account is lying for inspection. There are also valuations, bank charges, Master’s fees and, where a property changes hands, conveyancing costs to transfer it into the heir’s name. The good news is that heirs don’t pay transfer duty on a property they inherit.

Legal fees: If a dispute arises, for example over an unclear will, legal fees can easily run into the tens of thousands of rand.

Estate duty: Then there’s estate duty, a tax on what you leave behind. It’s calculated on the value of your estate after deductions such as your debts and the costs of winding it up.  Anything you leave to your spouse is also deducted. The first R3.5 million of what remains is not taxed, and the rest is taxed at 20%, rising to 25% on any amount above R30 million. If you are married, any portion of the R 3.5 million you don’t use passed to your surviving spouse, so a couple can shelter up to R 7 million between them. 

Capital gains tax. Death counts as a sale for capital gains tax, so it will be as if you had sold everything you own on the day you died. The good news is that the first R440,000 of capital gain is exempt in the year of death, and your primary home has its own, larger exclusion. Another plus is that capital gains tax on those assets is postponed on the assets your spouse receives until your they decide to sell them or passes away.

What could that add up to?

To put some numbers to it, here’s a simplified example of a single person whose assets are worth R6 million and who owes R500,000.

That is more than R600,000, or about 10% of everything this person owned, gone before the heirs receive anything. And this example does not yet include capital gains tax or any income tax owing to SARS. Every estate is different, but the point is clear: the bill is real and it needs planning.

The good news is that much of it can be reduced or at least made easier to pay. Here are the ways to lower the financial impact on the people you leave behind: - 

1. Get your affairs in order, starting with a valid will

This is the foundation of everything else. If you die without a valid will, the law decides who inherits, and that may not be who you had in mind. The Master will also appoint an executor, who will usually have to provide security, which is a guarantee that the estate pays for. A properly drafted will lets you choose your executor and exempt them from providing security, saving that cost.

If you have young children, your will can also set up a trust for their inheritance. Without one, money left to a minor is generally paid into the Guardian’s Fund until they turn 18. Review your will after major life events like marriage, divorce, a birth, or a death in the family, because an outdated will can cause exactly the kind of disputes that push legal fees up.

Then make your executor’s job easy. Keep an up-to-date list of what you own and what you owe: bank accounts, investments, policies, retirement funds, property, vehicles, loans, and any business interests. Note where your original will, title deeds, marriage certificate and antenuptial contract are kept, and leave secure instructions for digital assets like cryptocurrency, which can be lost forever if no-one knows they exist. An organised estate means less admin, fewer legal costs and less interest building up on debts while the estate is wound up, and it puts you in a stronger position to negotiate a lower executor’s fee.

2. Agree the executor’s fee before you need to

The 3.5% is a ceiling, not a fixed price, and many professionals will charge less on a straightforward, well-organised estate. On a R6 million estate, every half a percentage point is worth R30,000 plus VAT. It’s far easier to agree this while you are alive, so put it in writing and make sure your family knows what was agreed.

3. Plan your estate and your spouse’s together

Leaving assets to your spouse is one of the most effective ways to reduce the bill on the first death. There’s no estate duty on what passes to your spouse, capital gains tax is postponed, and if you don’t use your full R3.5 million tax-free amount, whatever is left over passes to your surviving spouse, so a couple can shelter up to R7 million between them.

The key is to look at both estates. Leaving everything to your spouse postpones the tax rather than removing it, so their estate will be bigger, and the bill arrives when they pass away. The executor’s fee also still applies to assets that go through your estate to your spouse. By planning both estates together, using tools like the donations allowance and the right nominations below, you lower the total cost to the family across both deaths, not just the first.

4. Check your retirement fund and policy nominations

Money in a pension, provident or retirement annuity fund generally does not form part of your estate, so it attracts neither estate duty nor an executor’s fee. The fund’s trustees decide who receives it, looking first at the people who depended on you financially, and your nomination guides their decision.

A living annuity works differently. It pays out to the people you nominate, but if there is no valid nominee, the money lands in your estate, where it attracts the executor’s fee and gets caught up in the delays of winding up the estate.

Life policies are different again. A policy with a named beneficiary pays out directly to that person, so there is no executor’s fee on it, but its value is still counted for estate duty unless it goes to your spouse. Check your nominations after major events like marriage, divorce, or new additions to the family. An outdated nomination can send money to an ex-spouse, or into your estate when you never intended it to.

5. Make sure the cash is there

If the estate is short of cash, your heirs may be asked to cover the gap themselves, and if they can’t, the executor may have to sell assets. A forced sale has costs of its own, such as an estate agent’s commission of 4% to 7.5% plus VAT, and it is seldom the best time to sell.

You can avoid nasty shocks by taking out life cover or holding a cash reserve aside for the bill. Speak to your adviser about whether a policy should pay out to your estate or to a named person, as each option has its pros and cons.

6. Use your annual donations allowance

You can give away up to R100,000 a year without paying donations tax, and gifts between spouses are tax-free. Over time, giving assets or money to your children or a trust during your lifetime means there is less in your estate at death, which lowers both the executor’s fee and estate duty. The golden rule is never to give away money you may need to live on. Your own financial security comes first.

7. Stay on top of your tax affairs

SARS must issue a tax clearance before anything is paid out to your heirs. Every outstanding tax return has to be filed, and any tax owing settled first. Whatever is owed, including penalties and interest, comes out of what you leave behind, and missing returns can add months to the process.

8. Plan separately for offshore assets

An important consideration for wealthy South Africans is that if you have assets held offshore, the administration could involve more than one country and more than one set of obligations to meet. That can mean foreign lawyers, foreign fees and, in some countries, inheritance taxes of their own, on top of South African estate duty on your worldwide assets.

Whether you need a separate offshore will depend on what you own and where it is held. Some offshore assets can be dealt with under a worldwide will drafted in South Africa. Others, particularly property, are usually governed by the rules of the country where they are situated, and a separate will for that country can save your family a great deal of time and money. If you do have more than one will, they must be drafted to work together, so that one doesn’t accidentally cancel the other.

If you own property in most European Union countries, the EU Succession Regulation, often called Brussels IV, is also worth knowing about. Many European countries have forced heirship rules, which dictate that certain family members must inherit a fixed share. The regulation allows you to state in your will that the law of your nationality, in this case South African law, applies to your estate instead. It won’t reduce any taxes in that country, but it can protect your wishes and help avoid costly disputes. Ask your adviser to make sure this choice is properly recorded in your will.

The bottom line

You can’t avoid the bill, but you can make it smaller and make sure it can be paid. Rather than waiting on the inevitable, I suggest you ask your adviser one question this month: if I died tomorrow, what would my estate cost, and where would the cash come from?

And while you’re at it, two small steps make those first weeks easier for your family: a funeral policy, which usually pays out within days while the rest of the estate is still frozen, and making sure your spouse or partner has a bank account in their own name.

* Malissa Conlin, FPSA®, is a Director, General Manager, a fiduciary services specialist, and manages legal and compliance at Brenthurst Wealth (malissa@brenthurstwealth.co.za).