LIQUIDITY – THE KEY COMPONENT

LIQUIDITY – THE KEY COMPONENT

By: JARED BRYCE-BORTHWICK

One often hears the phrase, “The decisions you make today, may affect you for the rest of your life”. When it comes to estate planning, however, the decisions you make today don’t affect you directly, but they may certainly affect your family or loved ones for the rest of their lives.

Unfortunately, this is a frightening reality for some people out there, and it could be for you too if you have not created sufficient liquidity in your estate.

What is liquidity?

Liquidity can be defined as “the ability to convert an asset into cash quickly”. This can be in the form of:

  • Cash and investments,
  • A life insurance policy payable to your estate,
  • Proceeds from a buy-and-sell agreement, and/or
  • Credit loan accounts.

Why you need liquidity?

When one thinks of estate planning, the first thing that generally comes to mind is estate duty or death taxes. However, irrespective of your marital regime (in community of property, or with an ante-nuptial contract (ANC) with or without the accrual system), it is important to realise that effective estate planning is not simply having a will and planning for estate duty, as this is only but one of the potential liabilities that your estate will be liable for at your death. Other liabilities that your estate could potentially be liable for at your death include the following:

  • Executor’s fees – an amount that your elected executor will receive for their role in assisting in winding up your estate. Usually calculated at 3.99% (3.5% + VAT) of your gross estate.
  • Master’s fees – the fee charged by the Master of the High Court, approximately R600.00.
  • Funeral expenses – ranging from R10 000 to R25 000.
  • Cash bequests – any specific cash bequests to heirs as stated in your Last Will and Testament.
  • Income Tax – an income tax liability based on your last return.
  • Capital Gains Tax – upon death, a CGT event is triggered and therefore you may be liable for Capital Gains Tax on certain assets, e.g. rental property.
  • Liabilities – any debt that is still owing to creditors (loans, etc.)
  • Accrual claim – an accrual claim may arise if one is married out of community of property (ANC).

A comprehensive liquidity analysis will give you an indication of whether you have sufficient liquidity in your estate to provide for the above expenses. The risk of not having sufficient liquidity in your estate is that your heirs may face the threat of having to realise assets, such as property or motor vehicles, in order to pay for the above expenses. This could be disastrous for your family who may well need to live in the house.

Assessing your liquidity

Liquidity is often overlooked in estate planning as the focus tends to typically be on reducing estate duty. The potential danger that your family could face should you not have sufficient liquidity in your estate at death however is undoubtedly evident.

By simply nominating your estate as a beneficiary on one of your life policies, or by ‘freeing up’ cash now to make provision for liquidity, a shortfall can be avoided.

It is therefore imperative that you seek professional to ensure that you have adequate liquidity in your estate, and that you do not create an unnecessary financial burden for your family and loved ones.