Estate planning: Assets that fall outside your estate

A deceased estate comes into existence when a person dies and leaves property to his beneficiaries. Such an estate must be administered in terms of his Will, if one exists, or in terms of the Intestate Succession Act. However, when drafting your Will, keep in mind that certain assets will not be administered as part of your deceased estate and, as such, should not be dealt with in your Will. Let’s have a closer look at what this means and how these assets should be dealt with.

Retirement funds

In South Africa, those retirement funds governed by the Pension Funds Act, including pension, provident, preservation and retirement annuity funds, do not form part of a deceased estate. Rather, the distribution of funds held in registered retirement funds is regulated by Section 37C of the Pension Funds Act to which the trustees of the fund are bound. While you may have nominated beneficiaries to your retirement fund, the trustees of the fund are not bound to follow your wishes, making the distribution of retirement fund death benefits somewhat controversial. The process is also a fairly tedious and lengthy one as trustees are granted a period of 12 months from the date of death in which to make their determination, and this delay can cause financial stress for the financial dependants of the deceased. While the beneficiary nomination made on the fund is used as a guide by the trustees, the trustees have the final say as to how the benefits are to be distributed, although they must ensure the decision is equitable. When making their decision, the trustees must give consideration to the age of the parties involved, their relationship with the deceased, and the extent to which they were financially dependent on him prior to his death. They will also consider the financial means of the dependants, and whether the dependant is employed or has future earning potential. If the deceased has a legal duty of support towards a dependant, such as towards a minor child or surviving spouse, this will be considered by the trustees.

In terms of Section 37C, if the deceased has no financial dependants and his estate is solvent, the trustees must pay the nominees in the proportions in which they were nominated but only after a period of up to 12 months has expired – being a legal waiting period that is applied to give untraced dependants a chance to claim. Where the deceased has no beneficiaries nominated and no financial dependants, the retirement funds will be paid directly into the deceased’s estate. As the money paid to the estate will be subject to the winding up process, the executor is entitled to charge a fee although the money will not attract estate duty. Once the award has been made to the dependants and/or beneficiaries of the deceased, they will need to make a decision as to how they wish to receive the funds. They can choose to make a full cash lump sum commutation, although it is important to bear in mind that they will be taxed according to the retirement tax tables as applicable to the deceased. Another option available to them is to purchase a compulsory annuity in their name in which case no tax will be paid on the benefit, although they will be taxed on the income received from the compulsory annuity as per the prevailing tax tables. Thirdly, they can choose to take a combination of a lump sum cash and purchase a compulsory annuity with the balance.

Living Annuities

One of the key features of a living annuity is that your investment can be left to your nominated beneficiaries and does not form part of your deceased estate. The advantage of this is that your beneficiaries have almost immediate access to the funds as they are not subject to the winding up process. As such, living annuities make attractive estate planning tools where you have nominated a beneficiary or beneficiaries to the investment. The capital of the living annuity falls outside of the deceased estate and will therefore not attract estate duty. Unlike the case of retirement funds that fall within the ambit of the Pension Funds Act, it is not necessary that your beneficiaries to be financially dependent on you, and you are free to nominate whoever you choose. In the absence of a nominated beneficiary, the proceeds of your living annuity will be paid into your estate although no estate duty will accrue. However, your executor reserves the right to charge fees on this capital. Your beneficiaries can choose how they wish to receive the fund in your living annuity by making a lump sum withdrawal, transferring it to another living annuity, or a combination of both. However, when making a lump sum withdrawal, it is important to bear in mind that the funds will be subject to retirement tax tables as applicable to the deceased.

Business interests protected by a business assurance

If you have a large portion of your accumulated wealth invested in your business, a correctly structured business assurance policy can be used as a very effective estate planning tool. If you own a share of a business together with other shareholders, your share of the business would form part of your estate should you die. However, for a number of reasons, this is not always ideal. Firstly, your heirs may have no interest in being involved in the business, nor have any expertise to take over your position. Secondly, your business partners may wish to purchase your share of the business and may not want your beneficiaries involving themselves in their business dealings. Also, your beneficiaries may prefer to receive the value for your business interests so that they can invest the proceeds to generate an income. Business assurance is therefore an effective way of ensuring the succession of your business and that your heirs receive full value for your business interests, while not unnecessarily increasing estate duty. While the proceeds of domestic life policies are considered deemed property in a deceased estate, the proceeds of correctly structured business assurance policies are excluded.

Business assurance involves taking life and/or disability cover on the life of the shareholders to the value of their respective shares. In the event that one shareholder dies, the policy will pay the proceeds to the surviving shareholders which will allow them to purchase the deceased shareholder’s shares. The result is that the family of the deceased shareholder will receive the full value of the deceased’s business interests, while the surviving business owners can continue running the business without interference from the deceased’s heirs. In order to have a properly structured business assurance policy, there are a number of criteria that must be met including the signing of a buy and sell agreement. The agreement must set out the details of what will happen with a shareholder’s business interests in the event of death (or disability, if relevant), as well as details of the funding mechanism to be used to purchase such interests. For the policy not to be included for estate duty purposes, it is important that the policy is taken out by a person who is a co-owner of a business, and that the policy is specifically to be used to purchase the deceased shareholder’s business interests. Also, the policy must not be paid for by the insured shareholder.

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