By Leandri Spies, Regional Head
Ensuring that your personal debt is settled when you pass away is one of the primary objectives of estate planning. It is, however, important to understand what types of debt could be part of your deceased estate and what your executor's responsibility is in terms of settling these debts. A deceased estate is not a person, but simply a collection of rights and obligations of the deceased person, administered by a duly nominated and appointed executor.
In South Africa, dealing with the debts of a deceased estate is a complex process governed by the Administration of Estates Act,1965. During the administration process, the administrator must identify, verify, and settle all the debts of the deceased to ensure that creditors are paid, and the remaining assets are distributed to the nominated heirs. This summary explains the main types of debt in deceased estates and how the collection process works.
What is a creditor?
In relation to deceased estates, a creditor is a person or entity to whom a debt is owed by the deceased at date of death and who, therefore, has a right to claim payment from the estate. In the insolvency Rules 1986, r 1.17(3), the term "creditor" encompasses persons whose claims are of a certain value at the relevant date.
Examples of creditors in a deceased estate can include:
Secured debt:
The case of African Banking Corporation of Botswana Ltd v Kariba Furniture Manufacturers (Pty) Ltd and Others 2013 (6) SA 471, the court clearly explains that a secured creditor must have a claim which is secured by way of personal or a real right, that is subject to a binding agreement.
Mortgage or home loans are secured loans registered over immovable property. The creditor, usually a financial institution, has a claim over the property until the mortgage is fully paid off. Should the debtor pass away before the loan is settled, the holder of the loan becomes a creditor in the estate, and the full outstanding amount of the loan is due and payable. Vehicle finance is another form of a secured loan, secured by a motor vehicle. The creditor retains ownership of the vehicle, until such time as the full outstanding debt is settled. In a deceased estate, the full outstanding loan amount becomes due and payable.
Unsecured debt:
Personal loans are borrowed funds that are not tied to any specific asset. These include, but are not limited to, loans from banks or financial institutions without collateral. Collateral is defined as something pledged as security for repayment of a loan, to be forfeited in the event of a default. Credit card debts, and medical bills are also unsecured debt that forms part of most deceased estates.
Tax liabilities:
The deceased individual's tax liability and year of assessment terminates at the date of death and a new taxpayer, namely, the deceased estate is registered in respect of any income and liabilities that arise after the date of death. Although the deceased estate is regarded as a natural person, it is not considered as the equivalent of the natural person. The deceased estate will be liable for any taxes due and payable. This process is at times the cause of significant delays, due to the internal processes and procedures of third-party institutions' as well as possible backlogs.
Estate duty can be explained as the duty charged in terms of the regulations of the Estate Duty Act, 1955. The duty is charged on the dutiable amount of the value of the estate of a deceased. Outstanding taxes must be settled before distributing the estate to heirs. SARS has a preferential claim over other unsecured creditors.
Municipal accounts and service bills
All unpaid electricity, water, and other rates and utility bills, held in the name of the deceased during their lifetime will need to be paid by the deceased estate. This includes any unfulfilled contracts for services such as phone, internet, or other subscription services. The collection process for debts in deceased estates follows a structured procedure to ensure fair and lawful settlement. The Administration of Estates Act describes the specific processes to be followed by the executor regarding the settlement of claims.
The primary step to initiate the claim processing the estate, is the executor's placement of notices, namely, section 29 advertisements, in the Government Gazette and a local newspaper, calling on creditors to submit their claims within 30 days. The subsequent debt settlement process entails the payment of the secured creditors. These are typically settled by selling the secured assets if there are insufficient funds in the estate. The unsecured debts will be paid from the remaining estate funds after funeral expenses are settled. If the estate lacks sufficient funds, unsecured creditors may receive a pro-rata share of the available funds.
Key take-away
Managing the future debts of a deceased estate requires an in-depth understanding of the debts that will arise, in order to plan accordingly and provide sufficient funds for these liabilities. Skilled executors play a critical role in ensuring that all debts are settled legitimately and reasonably, safeguarding the interests of both creditors and beneficiaries. It is therefore of extreme importance that meticulous estate planning is done regularly throughout one 'lifetime.
FNB Fiduciary (Pty) Limited Registration Number 1986/003488/07- A subsidiary within the FirstRand Group of Companies. An Authorised Financial Services Provider.
