Estates & Trusts
When a person dies, it is the duty of his or her executor to determine the financial position of the estate as soon as possible.
- Is there enough cash in the estate to cover all the costs of administration as well as all the debts in the estate?
- If there is not enough cash, are there sufficient assets so that one or more of the assets can be sold (with the consent of the heirs) to cover the expenses?
Here it is important to note the difference between an insolvent deceased estate and an estate with a cash shortfall.
When the total debt of the estate is larger that the total value of the assets in the estate, the estate is insolvent and thus administered under Section 34 of the Administration of Estates Act 66 of 1965.
The executor is obliged to sell all assets in the estate (including assets in the name of the surviving spouse, if the spouses were married in community of property). The proceeds from the sale is then distributed among the creditors in the order of their respective claims, as determined by the Insolvency Act 24 of 1936.
On the other hand, there are estates where a cash shortfall exists. In all estates, there are certain administrative costs that must be paid, including advertising costs, bank charges and executors fees, and there may also outstanding debts (eg overdrawn credit cards or doctor's bills).
If the deceased had not done proper estate planning during his lifetime, and left only non-cash assets in his estate at the time of his death, there are two possible consequences –
- the heirs will have to pay the cash shortfall to the estate so that the assets can be retained instead of being sold; or
- the executor must, in collaboration with the heirs, decided to sell certain assets (e.g. shares or motor vehicles) so that the cash proceeds from this can be used to pay the estate's debts and administration charges.
A testator must do proper estate planning and provide for some cash in his estate, to prevent non-cash assets having to be sold at his death to pay the estate's debts.
Likewise, it is also important for heirs to realize that, if the testator did not provide for sufficient cash in the estate, they will either -
- have to pay in the cash to the estate themselves; or
- give their cooperation to the executor to decide which assets could be sold to generate sufficient cash to settle all the expenses.