Cash shortfalls in estates becoming a bigger problem
Sanlam Financial Services - Thinking ahead in financial services
Cash shortfalls in estates remain a problem and as a result of the current global debt crisis and concomitant high cost of living and poverty, the problem is becoming worse.
The fact that there is a cash shortfall in an estate does not mean the estate is insolvent. But, if the problem cannot be solved and a forced sale is the only solution, insolvency could be a risk if a good price is not fetched. And in today's unfavourable property market there is a good chance of a low price being fetched or, in some cases, no offers being received.
Estates with cash shortfalls can fall in two categories. The one category includes estates with various types of assets and liabilities, but not enough cash to meet liabilities or pay administration costs, including estate duty and other tax. These estates cannot be regarded as so-called impoverished estates.
The second category includes the so-called impoverished estates. These are the most common and cause virtually unresolvable problems. An estate of this type usually consists of a house, furniture and perhaps a car. If a dependant, such as a spouse, inherits the estate, it could become inadministrable and a dead end if the spouse is unable to pay the costs or take over the liabilities or secure a loan to make up the shortfall.
Executors have the right to realise assets in order to meet liabilities and costs. If there are liabilities and creditors insist on payment if an agreement for taking over the debt cannot be reached, assets will have to be realised.
However, if there are no or just a few liabilities, the executor may face other problems, such as bad publicity, if the spouse is left homeless owing to the payment of costs. If no one can assist the spouse financially, there is virtually no other solution.
There are many solutions for cash shortfalls in non-impoverished estates mentioned previously. Heirs can instruct the executor to realise certain estate assets in which they are not interested. Heirs can also take over certain liabilities, for example a bond, if they qualify. Another method is voluntary payments from own funds or funds obtained outside the estate, for example a policy on which he or she is a beneficiary.
The most recommended method is for the testator to make adequate provision in his estate for liabilities, costs and maintenance of dependants. The importance of taking out sufficient life insurance, if insurable, cannot be overemphasised.
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