Executor Fees and What Winding Up an Estate Really Costs

Most people who write a will think carefully about who inherits and barely at all about who administers. The second decision frequently costs more than any other line in the estate, and it is one of the few estate costs that is genuinely negotiable.

The prescribed tariff

An executor is entitled to remuneration set by tariff: 3.5% of the gross value of the estate, plus VAT where the executor is a VAT vendor, and 6% of income collected on behalf of the estate after the date of death.

The word doing the work is gross.

The fee is calculated on the total value of the assets, before deducting the bond over the house or any other debt. An estate consisting of a R3 million house with a R2.4 million bond outstanding has a net value of R600,000 — and an executor's fee calculated on R3 million.

At 3.5% that is R105,000 plus VAT, against an estate that will distribute R600,000. Nobody drafting the will intended that, and everybody involved could have avoided it.

It is negotiable, and when

The tariff is a maximum, not a fixed price. An executor's remuneration can be agreed at a lower rate, and the agreement can be recorded in the will itself.

The leverage exists while you are alive. When a bank or trust company offers to draft a free will and be nominated as executor, the free will is the marketing and the executorship is the product. That is a fair trade if the fee is right — and the moment to ask for a reduced tariff is before you sign, not afterwards.

Rates below the full tariff are commonly agreed, particularly on larger or straightforward estates. Ask, get it in writing, and have it recorded in the will.

After death the leverage is much weaker. Heirs can negotiate with a nominated executor, and a nominated executor can decline the appointment, but the family is negotiating at the worst possible moment.

A useful middle route: nominate a trusted individual as executor and have them appoint a professional agent to do the work at an agreed rate. The Master will generally require an individual executor without expertise to be assisted, but the fee is then a negotiated agency fee rather than the full tariff.

The other costs

The executor's fee is the largest, not the only one.

Master's fees, on a sliding scale, payable to the Master of the High Court.

Advertising. Two statutory notices must be published — one calling on creditors, one advertising the liquidation and distribution account for inspection — each in the Government Gazette and a local newspaper.

Conveyancing, where immovable property transfers to an heir. Transfer costs apply much as they do on a sale, though transfer duty does not apply to an inheritance.

Bank charges on the estate account, and the cost of valuations where assets need to be valued.

Estate duty, at 20% on the dutiable amount above the R3.5 million abatement and 25% above R30 million. The abatement is portable between spouses, so the unused portion of the first-dying spouse's abatement rolls over to the survivor.

Capital gains tax. Death is treated as a disposal of assets at market value, so CGT can arise in the final return, with a higher annual exclusion applying in the year of death.

Where the time goes

Winding up an estate typically takes six months to two years, and longer where there is property to sell, a business to value, or a dispute among heirs.

The sequence is fixed and it is why it takes so long: report the estate to the Master, obtain letters of executorship, open an estate bank account, advertise for creditors, collect assets and settle liabilities, prepare the liquidation and distribution account, lodge it with the Master, advertise it for inspection, then distribute.

Each step waits on the one before, and several involve statutory inspection periods that cannot be shortened.

The immediate consequence for the family is that the deceased's accounts are frozen while this runs. A surviving spouse without an account in their own name can be unable to pay for groceries for months — see dying without a will for why each adult in a household should hold an account in their own name.

A worked estate

Take an estate consisting of a R3 million house with a R2.4 million bond outstanding, R400,000 in a retirement annuity, R150,000 in a bank account, and a R1 million life policy naming the spouse as beneficiary.

What falls into the estate. The house at R3 million and the bank account at R150,000. The retirement annuity is allocated by the fund's trustees and does not form part of it. The life policy pays the spouse directly and bypasses it too.

The gross estate is therefore R3.15 million.

• Executor's fee at 3.5%: R110,250, plus VAT at 15% = R126,788
• Master's fees, advertising, conveyancing and bank charges: commonly R30,000 to R50,000 on an estate of this shape
• Estate duty: nil, if everything passes to a surviving spouse

What is available to pay that. After the bond is settled, the estate holds R600,000 of equity in the house plus R150,000 cash. The cash does not cover the costs, so either the heirs fund the shortfall or the house is sold.

Now change one thing. Suppose the executor's fee had been agreed at 2% in the will. The fee becomes R63,000 plus VAT — a saving of roughly R54,000, achieved by asking a question before signing a document.

And note what the life policy did: R1 million reached the spouse within weeks, outside the estate, unaffected by the freeze. That is what makes it the most useful single instrument in an ordinary estate plan.

What the executor is actually doing

It is worth knowing what the fee buys, because the work is real and the tariff is not simply a rent.

The executor identifies and secures every asset, establishes every liability, opens and operates the estate account, deals with the Master, handles the deceased's final tax return and the estate's own tax obligations, publishes the statutory notices, defends the estate against disputed claims, prepares the liquidation and distribution account to a prescribed format, transfers property, and distributes.

On a straightforward estate that is weeks of administrative work. On a contested one, or one with a business in it, it is considerably more.

The argument for negotiating is not that the work has no value. It is that a percentage of the gross estate bears no relationship to the effort involved — administering a R6 million house is not twice the work of administering a R3 million one, but the fee is twice as large.

How to make an estate cheaper to wind up

1. Negotiate the executor's fee in the will. The single largest saving available, and it costs a conversation.
2. Take out a life policy with a named beneficiary. It pays directly to the beneficiary, bypasses the estate, is not delayed by the process, and provides liquidity for the costs above.
3. Leave liquidity in the estate. Where there is no cash, assets — usually the house — must be sold to pay the costs. An estate that can pay its own duty and fees keeps its assets intact.
4. Use the spousal exemption. Assets left to a surviving spouse are exempt from estate duty, and the abatement rolls over.
5. Keep records findable. A schedule of accounts, policies, funds and debts saves the executor weeks, and the executor's time is being charged for.
6. Review after any major change — a marriage, a divorce, a property purchase, a business sale.

The nomination trap

Two things a will does not control, and which cause more surprise than anything else:

Retirement fund benefits are allocated by the fund's trustees to your dependants, and your nomination form is guidance rather than an instruction.

Life policies with a named beneficiary pay to that person directly, regardless of the will.

Both mean an out-of-date nomination can send money to an ex-spouse years after a divorce. Reviewing them takes minutes and no will can do it for you.

Frequently asked questions

Is the executor's fee calculated before or after debts?

Before. It is 3.5% of the gross value of the estate, which is why a heavily bonded property produces a fee out of all proportion to what heirs actually receive.

Can I appoint a family member as executor?

Yes. The Master may require an inexperienced executor to be assisted by a professional agent, and that agent's fee is negotiated rather than set by tariff.

Does my spouse pay estate duty on what I leave them?

No. Assets left to a surviving spouse are exempt, and the unused portion of your R3.5 million abatement transfers to them.