Three financial factors to consider when drafting a will

While a will provides a clear roadmap for how one’s assets must be distributed, it doesn’t solve the problem of liquidity – often a major issue when it comes to the costs involved in winding up an estate. 

Here are some of the hidden costs and factors to consider when the executor – the person or entity you appoint to handle the estate, from settling debts to distributing the inheritance – steps in:

1. The maximum legal fee an executor can charge is regulated at 3.5% of the gross value of the estate, plus 6% on any income earned by the estate after the deceased’s death. While this may seem like a small percentage, it can amount to a substantial sum. For example, on an estate valued at R2 million, the executor fee alone could be R70,000, excluding VAT.
2. The fee is calculated on the gross value of the estate, not the net value after debts are paid. This means a family could be left in a difficult position if the estate’s primary assets, such as a family home or a business, cannot be easily converted to cash. If there isn’t enough cash to cover the executor fees and other costs, assets may have to be sold, sometimes at a distressed value, leaving heirs with less than they expected.
3. Life insurance doesn’t equal estate liquidity. Yes, a life insurance policy payout can be a valuable financial resource for your family after you’re gone, but it doesn’t automatically cover the costs of winding up your estate unless specifically structured to do so. A standard life policy is usually paid to a nominated beneficiary, bypassing the estate and therefore not available to settle debts and fees. 

It is therefore crucial to speak to an accredited financial adviser to help you with financial solutions specifically designed to cover estate costs. This could be a separate policy that pays out directly to the estate or an investment that can easily be liquidated without incurring penalties.

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