The importance of an estate and liquidity analysis

The importance of an estate and liquidity analysis

An estate and liquidity analysis is essential for ensuring that a client's assets and finances are structured properly, so that they can mitigate any potential estate taxes, as well as to ensure that there's sufficient liquidity in the estate.

In the past, we have noticed clients that have stood to lose up to 30% of their entire wealth at death due to capital gains tax implications, as well as estate duty implications.

Also, not having a properly structured will in place could have a lot of unintended consequences. By completing this exercise for a client, we'd be able to identify those issues, and it's a relatively short exercise to complete.

What causes a liquidity shortage?

There are many reasons for a liquidity shortage in an estate, the most important is where a will is not aligned properly to the asset structure. This could now result in potential estate duty in the estate, as well as certain capital gains tax implications, should the executor now have to sell off the deceased shares as well as property.

Also, surety's may be called up at death, this will create an extra liability in the estate, which the executor will first need to settle before any bequests can be made.

This is why we reiterate why important it is for a client to go through this exercise, it enables them to understand the potential risks that they have in the estate and to cover them adequately as well. We could help save a client up to 20% of loss of their entire wealth at death by going through this exercise.

How to mitigate liquidity shortfalls

Once a client has been provided with a clearer picture of where their estate lies and what expenses could be incurred, we can then provide them with mitigating options as to how to decrease those shortfalls going forward.

These could include addressing the liquidity issues, restructuring of the asset allocations, in terms of the estate structure as well, and the last would be making sure that their will is in line with the end objective. In the past, we have seen many clients that are asset rich, however, they lack the proportional liquid assets in order to settle these expenses in the estate.

What then happens is that at death, the executor now will need to probably sell off certain assets in order to make up for the shortfalls that are in the estate.

This has the following impacts on its own. The first is that there could be a significant delay in the winding up of the estate process and the administration becomes far more complex.

It also affects the operational ability of successful businesses going forward, as they will be affected during this winding up of the estate process as well. And it will lead to a capital gains tax implication.

Investec Life

At Investec Life we have a team of professional, skilled, and salaried advisors who can assist clients with this type of exercise. This service is actually built into a client's private banking fees, and we see it as a value add for a client where they can have everything in one place.