Clearly nominating beneficiaries plays a critical role in effective estate planning. Incorrect or unclear beneficiary nominations can significantly impact policy outcomes, incur extra estate costs, and ultimately reduce the inheritance your loved ones receive. In this article, we’ll explore how beneficiary nominations work across different policy types, ensuring your wishes are properly executed.
Retirement funds and dependants
All retirement funds are governed by the Pension Funds Act, with Section 37C being the key legislation overseeing beneficiary nominations. Section 37C ensures that no financial dependant of a deceased member is left without support, placing a duty on fund trustees to identify and trace all financial dependants before distributing death benefits. While a member may nominate beneficiaries, trustees prioritize dependants, which may include a spouse, children, siblings, aged parents, or even grandchildren. Therefore, nominees are not guaranteed a portion of the benefits. Trustees have up to twelve months to complete their investigation, allowing time for any untraced dependants to come forward, and this timeline should be carefully considered when drafting your estate plan.
Did you know? The 12-month investigation period allowed by retirement fund trustees helps prevent financial dependants from being unintentionally excluded.
Domestic life insurance policies
Life policies are valuable estate planning tools, particularly for providing liquidity and financial security to your loved ones. Their effectiveness, however, hinges on proper beneficiary nomination. For instance, if the life policy’s goal is to create liquidity in your estate, nominating your estate as the beneficiary ensures that, upon your death, the proceeds will be paid directly to your deceased estate. It’s important to note, however, that life policy proceeds are considered deemed property and are included in the estate duty calculation. Therefore, when determining the amount of cover needed, be mindful of the potential estate duty on the proceeds. According to Section 4(q) of the Estate Duty Act, any property that accrues to the surviving spouse, including life policy proceeds where the spouse is the named beneficiary, is deductible from the gross estate and exempt from estate duty. As minor children have limitations on how they can receive inheritances, it is crucial to structure life policy beneficiary nominations carefully when they are intended to benefit minors.
Did you know? Life policy proceeds nominated to your surviving spouse are exempt from estate duty, potentially saving your estate significant costs.
Business assurance and key person policies
If you hold shares in a business or own key person cover, it is important to note that business assurance policy proceeds are exempt from estate duty, provided the policy is correctly structured. To qualify for estate duty exemption on a buy-and-sell policy, the policy must be taken out by a co-owner of the business with the deceased and be specifically intended to purchase the deceased shareholder’s business interest. Additionally, the deceased must not have paid the premiums. 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.
Did you know? Correctly structured business assurance policies can entirely avoid estate duty, preserving business value for remaining shareholders.
Endowment policies and estate efficiency
Endowments, though somewhat complex, are valuable estate planning tools for individuals with a marginal tax rate of 30% or more. These policies allow multiple lives to be insured, enabling the endowment to continue after your death until the last life assured passes. Beneficiaries will only receive the proceeds upon the death of the last life assured, at which point the funds are paid directly to them according to the policy’s allocation. Nominating beneficiaries can help avoid executor’s fees; however, the endowment’s value will be treated as deemed property in your estate for estate duty calculation purposes.
Did you know? Endowment policies can significantly reduce executor’s fees, benefiting your beneficiaries directly.
Living annuities and beneficiary options
Living annuities are highly effective estate planning tools, but their success depends on proper beneficiary nominations aligned with your overall estate goals. When beneficiaries are nominated for a living annuity, the funds—if the initial retirement contributions were tax-deductible—are excluded from your deceased estate and exempt from estate administration. Upon your death, the living annuity provider will distribute the proceeds to your beneficiaries based on their chosen payout method. However, if no beneficiaries are named, the proceeds will be included in your deceased estate and can help create liquidity. Keep in mind, though, that these proceeds will be subject to estate duty and considered when calculating executor’s fees. Be sure to account for this in your estate planning.
Did you know? Naming beneficiaries on a living annuity ensures the funds bypass your estate entirely, eliminating executor’s fees and speeding up distribution.
Have a great day.
Sue
