Outline: It is general knowledge that estate debts must be paid from the properties of the estate. In this blog, we will cover the hierarchy of payments in a deceased estate.

INTRODUCTION

In Roman Law, heirs were obligated to take over the deceased estate. Fortunately, in South African law, no one can be forced to pay a deceased person's debts. However, there must be enough cash in the estate to cover all debts, administration costs, and specific cash inheritances. This blog focuses on the differences between a deceased estate and an estate of a living person, as well as the hierarchy of administration and creditor costs, and which beneficiaries' inheritance will first be involved in the event that there is not enough cash in the estate. To understand the payment of creditors’ claims and administration costs, let us first attend to understanding what a deceased estate is.

WHAT IS A DECEASED ESTATE?

In South African law, a deceased estate refers to all of a deceased person’s properties, debts, and inheritances at the time of their passing. However, it is important to distinguish the legal term "deceased estate" from the estate of a living person, as there are significant differences in the legal framework, responsibilities, and expenses involved.

For instance, upon one’s passing, any person, organisation, and/or government entity to whom monies are owed must be paid in full, unlike when one is alive and can pay off certain debts over a certain period of time.

Another difference is that a legally competent person is in charge of their own estate, whereas a deceased estate vests immediately in the Master of the High Court upon the passing of the deceased. The Master’s office is a functionary of the Department of Justice, which holds a statutory designated jurisdiction over the estates of deceased persons in South Africa in accordance with section 4 of the Administration of Estates Act 66 of 1965. One of its statutory duties is to appoint a suitable and competent executor or executors to manage the deceased estate.

During the executor’s management, also known as administration of the estate, there are certain expenses unique to a deceased estate. The allowed expenses are regulated by law, including their maximum and minimum amounts, such as Master’s Fees and executor’s fees.

The executor immediately takes charge of the deceased estate properties upon appointment, and determines the validity of claims against the estate, as well as identifying and determining the values of all administration costs. If there is not enough money available in the estate, beneficiaries are left with two options: either to pay the difference, or to agree that estate properties be sold, insofar as necessary, to cover the shortfall.

Let us look now at the hierarchy of payment in a deceased estate.

The Hierarchy of Payment of creditors

In the administration of a deceased estate, creditors must be paid in a specific hierarchy to ensure that all debts are settled before any inheritances are distributed. The order of payment is as follows:

1. Administration costs: These expenses are considered a priority and include executor fees, Master's fees, advertisement costs, postage costs, bank costs, valuation fees, and transfer fees. These costs are allowed by the provisions of the Estate Administration Act and its regulations, as well as the guidelines set by the Master in accordance with the law.
2. Funeral expenses: The cost of the funeral is considered a priority claim and is paid next.
3. Creditor claims: If there is not enough money in the estate to pay all debts, the executor can sell property to pay the remaining creditors. If there is still not enough money, the estate will be declared insolvent, and all of the properties will be sold to pay the creditors, starting with the administration costs. Creditors are paid in the following order:
3.1 Secured creditors: These creditors have a legal right to the property that was used as security for their debt, such as mortgage holders or car finance companies.
3.2 Preferent creditors: These creditors have a special status under the law that entitles them to priority payment, such as employees or the South African Revenue Service.
3.3 Concurrent creditors: These creditors have no special status and are paid from the remaining funds after the administration costs, funeral expenses, secured creditors, and preferent creditors have been paid.
4. Maintenance claims If a surviving spouse, minor, or dependent child has a proven maintenance claim, it will be paid before the beneficiaries’ inheritances. This is a claim where the deceased person was responsible for providing ongoing support and maintenance to someone. After payment of the maintenance claim the executor sees to it that the beneficiaries’ inheritances are paid or transferred in accordance with the South African set intestate rules and/or the deceased’s Will.
Beneficiary’s hierarchy of payment
After all of the creditors have been paid, the remaining funds in the estate are then distributed to the beneficiaries. However, certain beneficiaries may be required to effectively pay off the estate debts using their inheritances, depending on their hierarchy order. Thus, a shortfall in an estate might result in all or some of the beneficiaries not receiving their inheritances in full. This order is as follows:

1. Cash Inheritances: If there is any money left in the estate after all creditors have been paid, cash inheritances are paid next.
2. Residuary inheritance: Finally, if there is any money left after all creditors and cash inheritances have been paid, the residuary inheritance is paid. This is the amount that is left after all other inheritances have been paid.

It's important to note that a beneficiary who receives a specific named possession is not responsible for paying administration costs and estate creditors from their inheritance. The burden instead falls on beneficiaries who do not receive any specific named possession from the estate, such as an intestate beneficiary who inherits according to South African rules or a beneficiary who receives the residue or entire estate in terms of the will. In this case, their inheritance property will be used to cover any shortfall in the estate. If there's still a shortfall after selling the residue, then the beneficiary who received a specific named possession must pay the debts from its proceeds or pay the difference to secure their inheritance.

CONCLUSION

In conclusion, the payment of debts in a deceased estate is a complex process that must follow a strict hierarchy of payment. All debts, administration costs, and funeral expenses must be paid before any inheritances can be distributed. If there is not enough money in the estate to cover all debts and expenses, beneficiaries may be left with a shortfall. 

It is important to seek the advice of a legal professional to ensure that the administration of the estate is carried out in accordance with the law and to protect the interests of all parties involved.