Will you have enough cash when you or your partner dies?
We are often reminded that estate planning is an ongoing process rather than an event, but an aspect of the planning that is frequently overlooked, and not sufficiently emphasised, is the need for a sufficient amount of cash to be readily available when an individual dies – something which must be constantly monitored.
David Knott, a fiduciary expert and Director at Private Client Trust says that whilst we are employed, the general rule is to have a reserve fund of six month’s income readily at hand to fund emergencies. However, according to Knott this reserve fund will not be adequate in the event of death which may result in the forced sale of assets. The recent collapse of the Rand with the resultant slide of equities on the JSE and the hardening of the housing market indicates that this is not the time for selling!
Sudden extra expenses that will need to be met.
“Apart from your normal household debt covering mortgage bonds, car finance, clothing accounts, school fees and the like, in the event of yourself or a partner dying, there will also be the costs associated with the administration of the estate-executors fees, last illness expenses, funeral costs, your final income tax assessment which could include capital gains tax and of course if your estate is sufficiently large there could be an estate duty liability.”
“There could be a maintenance obligation to a previous spouse or minor children which needs to be met. These obligations rarely die with you,” warns Knott. “The monthly sum, annualised and then calculated over the term that the obligation must run is certainly going to amount to a sizable capital sum, which without careful planning could severely cripple the estate.”
“If one is married by ante nuptial contract, it would be wise to re-visit the contract just to make sure that the promises made at that time have been met as any outstanding gifts or settlements will constitute a claim against the estate.”
Knott further advises that one should not overlook any guarantees or sureties you may have signed on behalf of a business or maybe assisting a child to obtain finance as the provider of the finance facility will not allow the estate to merely walk away from the obligation.
“Your current Will must be looked at to make sure that the estate has sufficient cash to meet all bequests and of course that the bequests are still reasonable. For example - you may have bequeathed a sum to each of your grandchildren, nieces or nephews when they were few in number, but their numbers may have expanded resulting in quite an outflow from the estate where your spouse is now in greater need. Assets which are co-owned may also require cash to buy out the partner, depending on the agreement.”
“As circumstances vary amongst individuals so greatly, it would be prudent for you to sit with a trusted wealth manager and or advisor and critically analyse your own asset and liability position, taking into account any obligations which will continue after your death, including settlements in terms of your Will,” advises Knott. “Ask questions such as; if there would be a liquidity shortfall - could this be covered by the easy sale of certain assets without hardship? Is it affordable to cover this eventuality by the purchase of insurance?
Should the terms of the Will be amended? Indeed a consultation with a wealth manager with knowledge of executors fees, funeral expenses and income tax and suchlike could be a very good idea.”