In the intricate process of settling an estate after the passing of a loved one, it is crucial for both Executors and beneficiaries alike to understand the methods of liquidation and the determination of solvency of a deceased estate. To this end, once the Master of the High Court issues a Letter of Executorship, the executor embarks on a series of steps in the administration procedure to ensure that the administration and distribution of an estate is done in an orderly fashion, so as to ensure that the necessary dignity is given to the financial affairs of the deceased person.
Determine the solvency of the Estate
After the Master of the High Court has issued a Letter of Executorship, the Executor (or the Agent of the Executor) must place a notice in a newspaper circulating in the area where the deceased was ordinarily resident at date of death, as well as in the Government Gazette. The purpose of the aforesaid notice is to advise creditors of the death of the deceased and to afford them a specified period of minimum 30 (thirty) days to note their claims against the estate with the Executor. After the period for the lodging claims had expired, the Executor must assess the solvency of the Estate.
Should the Executor find that the estate is insolvent, the administration will proceed in terms of the provisions of Section 34 of the Administration of Estates Act No. 66 of 1965.
Upon reaching this determination, the Executor must provide a written notice, which must also be submitted to the Master, reporting the position of the estate to the creditors. In this notice, the Executor informs the creditors that unless the majority of all the creditors (in both number and value) instructs him in writing, within a specified period of not less than 14 (fourteen) days, to surrender the estate under the Insolvency Act No. 24 of 1936, the Executor will proceed to liquidate the assets in the estate.
Methods of liquidation
The Executor's duties are to sell just enough of the estate's assets as the Executor reasonably requires in order to create liquidity in the estate to pay the liabilities, cash bequests and estate duty, unless the Will provides otherwise.
The creditors and beneficiaries have no right to their claims/inheritances before the Liquidation and Distribution Account had lain open for inspection, free of objection. Even though the Executor has broad powers in this regard and can sell assets even if it goes against the Will, he still need to act responsibly towards creditors and heirs. As such, the Executor must use good judgment in deciding which assets to sell if there is not enough cash to cover everything, as he has a duty to manage the estate's assets carefully and fairly.
Section 47 of the Act also provides that the Executor must take written instructions from the heirs as to the sale of assets or awarding assets to them that had not been sold. If there is not complete agreement amongst the heirs, or a beneficiary is still a minor, the Executor can sell the assets with conditions approved by the Master of the High Court.
The following methods of liquidation are, accordingly, available to the Executor:
I. Award in specie (unrealized)
The Executor should use this method whenever possible, whereby the assets are transferred to the heirs in the identical form as they were held by the deceased
If a testator had done adequate estate planning, they should have left enough money in their estate to pay off debts. In such cases, there is usually no need to sell any of the estate assets and they can be awarded to the heirs in terms of the Will. Even if there is not enough cash in the estate, this method remains an option as long as the heirs pay or secure the shortfall in cash.
This method of liquidation has a number of advantages, as the Executor does not have to sell the assets, there would be no time delay for the sale and/or further capital gains tax (CGT) liability, which means that the administration process can be finalized a lot quicker.
However, certain situations may prevent the distribution of assets in their original form. For instance, if the deceased left agricultural property to multiple people, it may be necessary to sell the property or conclude a redistribution agreement, as such, it is crucial to have an attorney draft a thorough and legally sound will for you in order to prevent dissatisfaction or friction amongst heirs.
II. Partial sale of assets
If there is not enough cash in the estate, the Executor should not sell assets left to specific beneficiaries right away. Instead, the Executor should first attempt to settle the shortfall by selling assets that form part of the residue of the estate. If that is still not enough and the beneficiaries had not secured or paid the shortfall themselves, then he can sell assets left to specific beneficiaries.
As such, the Executor should first convert cash investments, such as shares, unit trusts, and fixed deposits, into cash. However, if these assets do not provide enough cash, then the Executor can sell movable assets, and if still needed, the immovable property, if any.
III. Total sale of assets
A total sale of assets takes place where the Will so directs or in exceptional circumstances.
If a person's Will specifies that all assets must be sold, then even if all the heirs unanimously agree to deal with the assets in a different manner as stipulated in the Will, then freedom of testation will prevail and the wishes outlined in the will override any agreements made by the heirs.
Additionally, a total sale of assets may take place if the estate is insolvent, or it may be requested by the heirs. However, it must be borne in mind that the approval of the heirs relates simply to how the assets are to be sold and not to the decision as to whether or not to sell the assets.
IV. Taking over by the surviving spouse in terms of Section 38 of the Estates Act
This method of liquidation is only used in exceptional circumstances and is typically applicable when the person making the will (the testator) is survived by a spouse and there are no contrary provisions in the Will against this method.
Should this method be applied, the surviving spouse will normally “buy out” the other heirs’ estate assets, or a portion thereof, at a valuation acceptable to the Master, in order to retain the estate’s assets, such as a family home, which would otherwise have been sold to provide liquidity or to avoid co – ownership.
The surviving spouse may secure such payments to the satisfaction of the master, or pay the amount in cash to the estate, whereby it is then used to pay the other heirs and creditors. Additionally, the consent of the major heirs, as well as the creditors and the Master, is a pre – requisite to this Application.
V. Redistribution agreement
This method of liquidation is the most common.
While redistribution agreements are often informal, especially when movable assets are involved. For example, an informal redistribution agreement might occur when different assets like furniture, vehicles, or jewelry are left in equal shares to the children. The children then typically decide amongst themselves who gets what, and this agreement is then reflected in the final reconciliation statement.
However, when it comes to immovable property, the redistribution agreement will need to be formalized, i.e., legally documented, and attached to the Liquidation and Distribution Account, whereby the Liquidation and Distribution Account must then be drawn accordingly.
JW Wessels and Partners Incorporated
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