Beneficiary nomination is key to your estate plan’s efficacy

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Beneficiary nomination is critical to the efficacy of your estate plan because incorrect beneficiary nomination can materially affect the nature of the policy, result in additional estate costs, and reduce the inheritance ultimately received by your loved ones. In this article, we explore the intricacies of beneficiary nomination in respect of the different types of policies.

(i) Retirement funds

All retirement funds (pension, provident preservation, and retirement annuity funds) are governed by the Pension Funds Act and, when it comes to beneficiary nomination, keep in mind that Section 37C is the overriding piece of legislation that governs this process, to the exclusion of all other laws. Designed to ensure that no financial dependant of the deceased member is left destitute, Section 37C places a responsibility on the fund trustees to identify and trace those who were financially dependent on the member at the time of death, and to distribute the death benefits accordingly. This means that while the member can nominate individuals to receive some of the death benefits, the trustees will give priority to the financial dependants of the member which could include a spouse, children, siblings, aged parents, grandchildren, or grandparents – meaning that there is no guaranteed that the nominees will receive a portion. Keeping in mind that the fund trustees have a fiduciary duty when conducting the affairs of the retirement fund, this process is strictly adhered to, although it can be time-consuming and labour-intensive. In order to allow time for untraced dependants to come forward, the trustees have up to twelve months to conduct their investigation and make the distribution, so it’s important to bear this timeframe in mind when putting your estate plan together.

(ii) Insurance policies

(a) Domestic life policies

Life policies make excellent estate planning tools, especially when it comes to providing liquidity in your estate and making financial provision for your loved ones – although their effectiveness is dependent on correct beneficiary nomination. By way of example, if the purpose of the life policy is to provide liquidity in your estate, it would be appropriate to nominate your estate as the beneficiary to the policy which will ensure that, in the event of your passing, the proceeds of the policy will be paid directly into your deceased estate. Having said that, keep in mind that the proceeds of a life policy are considered deemed property in your estate and will be included for estate duty calculation purposes. Thus, when calculating the quantum of life cover needed to provide for liquidity, don’t lose sight of the potential estate duty payable on the proceeds.

In terms of section 4(q) of the Estate Duty Act, the value of all property that accrues to the surviving spouse, including the proceeds of a domestic life policy where the spouse is the named beneficiary, is deductible from the gross estate of the deceased and is therefore not estate dutiable. Further, where a domestic life policy is registered under an ante-nuptial or post-nuptial contract where the spouse and/or child are the nominated beneficiaries, the proceeds of such a policy do not form part of the deceased’s dutiable estate. As minor children are limited in how they can receive their inheritances, be intentional about structuring the beneficiary nomination on life policies intended to benefit minor children. An effective estate planning technique involves setting up a testamentary trust in terms of your will with your minor children named as beneficiaries to the trust. Nominating the trust as beneficiary on your life policy will ensure that the proceeds of your policy will be paid to the trust in the event of your passing where they will be managed on behalf of your minor children until they are old enough to manage their own affairs.

(b) Business assurance policies

If you own shares in a business or are the owner of key person cover, note that the proceeds of business assurance policies are exempt from estate dutiable provided that the policy is correctly structured.  To qualify for an estate duty exemption on a buy and sell policy, the policy must be taken out by a person who is a co-owner of a business with the deceased. In addition, the policy must be taken out with the specific purpose of purchasing a deceased shareholder’s share of the business, and premiums must not have been paid by the deceased. In the case of key person assurance, the company that owns the policy must not be a family company in relation to the person whose life is insured. Further, the company in question must pay the premiums and must be the nominated beneficiary on the policy. The structuring of business assurance policies can be complex and we always suggest seeking expert advice.

(iii) Endowments

Although fairly complex in nature, endowments are useful estate planning tools for those with a marginal income tax rate of 30% or more. Endowments allow for multiple persons to be insured on the same policy which means that an endowment can remain active after your death until the passing of the last life assured. This means that any nominated beneficiaries on the endowment will only receive their benefit on the death of the last life assured, at which point the proceeds will be paid directly to the beneficiaries as per the apportionment on the policy. While nominating beneficiaries to an endowment can help avoid executor’s fees, note that the value of the policy will be considered deemed property in your estate for the purposes of calculating estate duty.

(iv) Living annuities

Living annuities are highly effective estate planning tools although, once again, the efficacy will depend on getting the beneficiary nominations correct depending on what you hope to achieve in your overall estate plan. Where you have nominated beneficiaries to your living annuity, the funds – to the extent that the initial retirement fund contributions qualified as a tax deduction – do not fall within your deceased estate and will not be subject to estate administration. In the event of your death, your living annuity service provider will pay the proceeds to your nominated beneficiaries in accordance with how they elect to receive the funds. Where you have not named beneficiaries on your living annuity, the proceeds will form part of your deceased estate where they can be used to create liquidity in your estate. That said, bear in mind that the proceeds will be taken into account for estate duty calculations and when determining executor’s fees, so be sure to factor this in when developing your estate plan.

(v) Tax-free investments

Your ability to nominate a beneficiary on a tax-free investment depends on the nature of the investment. Where the tax-free investment is operated under a life license, you are able to nominate beneficiaries on the investment which means that, in the event of your death, the proceeds will be payable to your beneficiaries immediately. On the other hand, if your tax-free investment is housed on a LISP platform, there is no mechanism to nominate beneficiaries and the funds held in this investment should be dealt with in terms of your will.

(vi) Unit trusts

Similarly, as unit trusts are housed on a LISP platform, these assets should be dealt with in terms of your will. The proceeds will therefore form part of your deceased estate and will be subject to potential estate duty and executor’s fees.

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