Dealing with deceased estates and maintaining their accounting records

June 1st, 2021
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Legal practitioners, as part of the services they may provide relate to deceased estates, either in the role as executors, administrators or as agents. In terms of the legislation that regulates legal practitioners, both the Legal Practice Act 28 of 2014 (LPA) and the Rules made under the authority of ss 95(1), 95(3) and 109(2) of the LPA, legal practitioners are required to prepare and maintain trust accounting records relating to deceased estates in which the legal practitioner is involved. This article does not seek to explore the administration of estates in detail but deals with certain areas that are of concern.

Section 87(3)(c) of the LPA states: ‘For the purposes of subsections (1) and (2), “accounting records” includes any record or document kept by or in the custody or under the control of any trust accounting practice which relates to –

(c) any estate of a deceased person or any insolvent estate or any estate placed under curatorship, in respect of which an attorney in the trust account practice is the executor, trustee or curator or which he or she administers on behalf of the executor, trustee or curator’.

Rule 54.6 dealing with accounting requirements states: ‘A firm shall keep in an official language of the Republic such accounting records, which record both business account transactions and trust account transactions, as are necessary to enable the firm to satisfy its obligations in terms of the Act, these rules and any other law with respect to the preparation of financial statements that present fairly and in accordance with an acceptable financial reporting framework in South Africa the state of affairs and business of the firm and to explain the transactions and financial position of the firm including, without derogating from the generality of this rule –

54.6.2 records containing entries from day to day of all monies received and paid by it on its own account, as required by sections 87(1) and 87(3) of the Act;

54.6.3 records containing particulars and information of –

54.6.3.1 all monies received, held and paid by it for and on account of any person;

54.6.3.4 any interest credited to or in respect of any separate trust savings’.

According to r 54.9.1, all such records shall be retained for a period of seven years from date of the last entry recorded in each book or other document of record or file.

Rule 54.15.1 of the Rules states: ‘Every firm shall extract monthly, and in a clearly legible manner, a list showing all persons on whose account money is held or has been received and the amount of all such moneys standing to the credit of each such person, who shall be identified therein by name, and shall total such list and compare the said total with the total of the balance standing to the credit of the firm’s trust banking account, trust investment account and amounts held by it as trust cash, in the estates of deceased persons and other trust assets in order to ensure compliance with the accounting rules’.

In terms of s 55(1)(b) of the LPA, the Legal Practitioners’ Fidelity Fund (the Fund) ‘is liable to reimburse persons who suffer pecuniary loss, not exceeding the amount determined by the Minister from time to time by notice in the [Government] Gazette, as a result of theft of any money or other property given in trust to a trust account practice in the course of the practice of the attorney or an advocate referred to in section 34(2)(b) as such, if the theft is committed –

(b) by an attorney or person acting as executor or administrator in the estate of a deceased person’. Considering the claims notified to and paid by the Fund relating to deceased estates over the past five years, the Fund has noticed that this category of claims has been in the top three categories of higher claims as can be seen in the table below.

Of note, the claims on deceased estates notified to the Fund relate to matters for which no bonds of security were issued by the Legal Practitioners’ Indemnity Insurance Fund NPC (LPIIF).

In terms of s 77(3)(a) of the LPA dealing with the provision of insurance cover and suretyships, the Board of the Fund may enter into deeds of suretyship to the satisfaction of the Master of the High Court, who, in turn, has jurisdiction in order to provide security on behalf of a legal practitioner in respect of work done by that legal practitioner as executor in the estate of a deceased person. The Fund, through the LPIIF that the Fund established in 1993, issues bonds of security to legal practitioners who are appointed as executors in deceased estate matters. Legal practitioners can obtain these bonds through other insurers and are not compelled to obtain them through the LPIIF. Where the LPIIF has issued bonds of security, claims arising from those deceased estates handled by the legal practitioner are reported to the LPIIF.

Claims notified and paid Financial year
2015 2016 2017 2018 2019
Notified  Number  111 106 129 Unavailable Unavailable
Value  R 37 914 562 R 52 729 070 R 53 055 931 R 48 992 767 R 19 383 982
Paid Number  40 40 44 Unavailable Unavailable
Value  R 14 747 537 R 14 747 537 R 9 797 338 R 23 377 752 R 45 917 919
Source: www.fidfund.co.za/financial-reports/

During the Fund’s inspections at some legal practices, it was noted that where the LPIIF issued bonds of security for deceased estates, legal practitioners failed to notify the LPIIF of a distributed and finalised estate resulting in the LPIIF continuing to reflect an open position on those bonds. Open positions on bonds of security negatively impact on the insurance premiums for the LPIIF. These open positions also impact on the Fund’s profiling of the legal practice and legal practitioner. Maintenance of accounting records could be a reminder for this notification as soon as ‘nil’ balances are recorded.

In terms of the Administration of Estates Act 66 of 1965, s 28 dealing with banking accounts states that:

‘(1) An executor –

(a) shall, unless the Master otherwise directs, as soon as he or she has in hand moneys in the estate in excess of R 1 000, open a cheque account in the name of the estate with a bank in the Republic and shall deposit therein the moneys which he or she has in hand and such other moneys as he or she may from time to time receive for the estate;

(b) may open a savings account in the name of the estate with a bank and may transfer thereto so much of the moneys deposited in the account referred to in paragraph (a) as is not immediately required for the payment of any claim against the estate;

(c) may place so much of the moneys deposited in the account referred to in paragraph (a) as is not immediately required for the payment of any claim against the estate on interest-bearing deposit with a bank’.

The Fund has noted – through inspections conducted at legal practices – that some legal practitioners do not open separate banking accounts as required in terms of this section for estate moneys in excess of R 1 000 but receive and keep the money in the general trust banking account of the legal practice. In this instance, the deceased estates form part of the general trust accounting records.

The Fund has noted through inspections that other legal practitioners do open estate late banking accounts into which estate’s money is deposited as required and the money not immediately required is deposited into savings and interest-bearing deposit accounts. What the Fund has not seen in several instances, is the preparation and maintenance of accounting records where estate late accounts and separate interest-bearing accounts are opened. The scope of the auditors who audit trust accounts excludes the audit of deceased estates accounts, except for those that flow through the general trust account of the legal practice, and this has resulted in this area of entrustment not being audited, and in turn led to some legal practitioners not maintaining the accounting records as required, and mishandling and/or misappropriating the money entrusted, hence the claims notified to the Fund. Legal practitioners should note that for purposes of inspections the Fund conducts at the appointment of the Board, deceased estates are not excluded from the scope of inspection. Legal practitioners should further take note that if at inspection it is found that the accounting records were not maintained, the inspector may write up the books and the cost for that inspection will be borne by the legal practice.

Because this area of entrustment poses a risk to both the Fund and the LPIIF, in that the issuing of bonds of security, both the Fund and the LPIIF have a vested interest on how these funds are dealt with at legal practices. As part of the profiling that the Fund conducts, the Fund also considers the deceased estates and their administration. Lack of controls or mismanagement of deceased estates raises the risk level of the legal practice and a legal practitioner, it may lead to an application through the courts for curatorship. Where there are concerns as to how deceased estates are dealt with by a trust legal practice, it may lead to an expanded inspection beyond just the deceased estates as they are symptomatic of a potential mismanagement of trust moneys in general.

In terms of s 51(4) of the Administration of Estates Act, ‘[a]n executor shall not be entitled to receive any remuneration before the estate has been distributed as provided in section 34(11) or 35(12), as the case may be, unless payment of such remuneration has been approved in writing by the Master’. There are tariffs determined for the executor’s remuneration, these being –

  • 3,5% of the gross assets of the estate; and
  • 6% of the gross income post the passing of the deceased; or
  • otherwise as provided in the will.

We have noted several instances where legal practitioners, following receipt of funds into the estate banking account, transfer funds from the estate banking account to their business banking account, sometimes before they even advertise the estate. This practice is not allowed as it amounts to contravening the requirements of the Act and possibly fraud. There is an exception in terms of fees earned on the sale of an immovable property of an estate. Fees relating to the conveyancing matter become due to the conveyancer on registration of the property in the purchaser’s name, and this happens before distribution of the estate as the proceeds from that sale form part of the distribution of the estate.

Lastly, the distribution of the estate should be done without any undue delay.

Conclusion

In conclusion, legal practitioners involved with deceased estates should always ensure compliance with all prescripts surrounding this area of entrustment. Care should be taken when winding-up or assisting to wind-up an estate of the deceased. More often than not, the beneficiary from the estate needs the property that is bequeathed to them. In some cases, young children are the beneficiaries and are fully dependent on the funds and assets entrusted with the legal practitioner. In other cases, the widow or widower needs the bequeathed money and/or property to raise the children of the deceased. It is important that legal practices dealing with deceased estates are properly managed, and people within the legal practice dealing with deceased estates should protect the image of the profession and manage the estates correctly and in accordance with the prescribed legislation. If the trend in theft of funds from deceased estates continues to be high and not curbed, it poses a major risk to the Fund, and a risk to the sustainability of the Fund. Credibility of a legal practitioner goes a long way in protecting his or her reputation, legal practice, and the profession.

Preparation and maintenance of accounting records for deceased estates not flowing through the general trust account must always be ensured as it can assist in early detection of any wrongdoing.

Simthandile Kholelwa Myemane BCom Dip Advanced Business Management (UJ) Cert Forensic and Investigative Auditing (Unisa) Certified Control Self Assessor (Institute of Internal Auditors) Cert in Management and Investigation of Cyber and Electronic Crimes Cert in Fraud Risk Management Cert in Law for Commercial Forensic Practitioners Cert in Investigation of Financial Crimes Cert in Investigation and Detection of Money Laundering Cert in Economic Crime Schemes (Enterprises University of Pretoria) is the Practitioner Support Manager at the Legal Practitioners’ Fidelity Fund in Centurion.

This article was first published in De Rebus in 2021 (June) DR 6.

 

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