Estate liquidity: why a wealthy estate can leave a cash-poor family

An executor cannot distribute an estate, and SARS will not issue clearance, until the estate's liabilities are settled.

Typical cash demands in the first 12 months include: funeral and immediate dependant maintenance; the bond and any shortfall on transfer; rates, levies, insurance and security on the home; outstanding personal-tax assessments and the deceased's final tax return; estate duty (where applicable); CGT on deemed disposals; executor's remuneration; Master's fees; and conveyancing costs on transfers to heirs.

All of this lands before the heirs see a cent. If there is no liquid cash in the estate, the executor has to sell something to raise it - and that is where the family home or the share portfolio gets sold at the wrong moment.

Retirement annuities, pension funds and provident funds are paid out under Section 37C of the Pension Funds Act - not under the will. The fund trustees decide who receives the benefit (factoring in financial dependency), and the payout falls outside the estate.

This is generally a good thing for the family - the money pays directly to dependants, fast, without going through the executor. But it also means the executor cannot use those funds to pay the estate's debts, taxes or fees.

Plan as if the retirement-fund money will not be available to the executor, because, legally, it is not their money.

The classic scenario: family home worth R6m with a R2m bond, an RA worth R3m payable directly to dependants, and R200,000 in the cheque account.

Estate cash needs: bond settlement on transfer, executor's fees on the gross R6m house (3.5% = R210,000 + VAT), rates clearance, conveyancing fees, possibly estate duty.

Total cash needed inside the estate: easily R500,000 to R1,000,000. Available cash inside the estate: R200,000. The bond cannot be paid; the bank starts to charge default interest; the executor has to sell the house to raise the shortfall.

The cleanest fix is a properly structured life-cover policy with the estate as beneficiary (or no beneficiary nomination, so the proceeds fall into the estate). The proceeds are then available to settle estate liabilities directly.

An alternative is a policy with a nominated beneficiary plus a written instruction to the beneficiary to advance funds to the estate against an heir's share. This is faster than waiting for the policy to fall into the estate, but requires trust between heirs.

Where the estate includes a business interest, a buy-and-sell arrangement under Section 3(3)(a)(iA) of the Estate Duty Act provides liquidity to the deceased's family while transferring control to the surviving partners.

Build a one-page liquidity statement: assets in the estate, debts to settle, executor's fees on gross asset value, estate duty (if relevant), conveyancing and sundry costs, expected cash on hand. The shortfall is your liquidity gap.

Re-run the calculation when you take on a new bond, sell or buy a major asset, or your spouse takes early retirement. The gap moves with your balance sheet.