Where a member of a retirement fund dies before formal retirement, the death benefits are distributed in accordance with the somewhat contentious Section 37C of the Pension Funds Act which places an onerous duty on the fund trustees. They need to determine the fair and equitable distribution of the benefits amongst those who were dependent on the member at the time of death. The effect of Section 37C is to place limitations on the member’s freedom to allocate the death benefit, and it’s vital to understand how this piece of legislation can affect your estate planning.
At the outset, it is important to keep in mind that, being regulated by the Pension Funds Act, retirement fund death benefits fall outside of the member’s deceased estate and, as such, the member should refrain from dealing with these assets in terms of his/her will. Remember, having afforded the member significant tax concessions for contributing towards a retirement fund, the intention of the Act is to alleviate the burden on the State by reducing the need for the member’s dependants to rely on social grants if they were financially dependent on the member.
While the Act makes it clear that, on the death of the member, the trustees must launch an investigation to determine those who fall within the ambit of ‘dependant’, the process is far from easy and can be complicated by more blended family structures, multiple generations living under the same roof and couples who choose to live together outside the tenets of marriage. As a guide to the trustees, legislation makes provision for different types of dependants and nominated beneficiaries and, if you’re a member of a retirement fund, it is essential to understand who may qualify and on what basis.
A member’s legal dependants are those in respect of whom the member owed a legal duty of support, such as in the case of a child or a spouse. By way of definition, a legal duty of support refers to a duty that is enforceable by law. The Act allows for the broad definition of the term ‘spouse’ so as to include those who are married by way of civil marriage or civil union, as well as those in permanent life relationships. That said, it remains the job of the trustees to determine whether a permanent life partner qualifies as such. Where a couple is separated but not yet divorced, note that the surviving spouse retains her rights as a spouse of the member. Where an ex-spouse has a valid maintenance claim against the deceased member, note that she will qualify as a financial dependent regardless of whether the member honoured his maintenance obligation. Generally speaking, legal dependants would include the spouse and children of the deceased member but could include parents, grandparents, grandchildren, and siblings depending on the circumstances.
The factual dependants of the member would include those people to whom the deceased owes no legal duty of support but who were factually dependent on him at the time of death. Factual dependants could include a life partner or an adult child who is not financially dependent, although note that the factual dependent would need to provide proof that he was being maintained in some form by the deceased.
Future dependants would include those people whom the deceased member did not financially maintain or support at the time of his death but who would have been maintained if he was still alive. Future dependants could therefore include unborn children or a fiancé of the deceased member. As in the case of factual dependants, future dependants would need to provide evidence that the deceased member would have been liable for maintenance had he not died.
When filling out the beneficiary nomination form, the retirement fund member can include the names of his financial dependants and any other person that he would like to receive a portion of the death benefit and, in doing so, can specify what portion of the benefit he would like each person to receive. However, it is important to understand the difference between a financial dependant and a beneficiary in this context. A nominated beneficiary is someone who does not qualify as a dependant in terms of the Act but who is nominated in writing by the deceased, whereas a dependant is someone who is financially maintained by the member. Note that a beneficiary can include natural persons, trusts, or legal entities. That said, keep in mind that the listed nominees will only be used as a guide by the trustees when making their determination with their primary goal being to allocate the benefits amongst those who were financially dependent on the member at the time of his death. The investigation into financial dependency can be labour-intensive and time-consuming, and to assist with the process the trustees will give consideration to the following:
- The age of the dependants
- The dependants’ relationship with the deceased member
- The extent to which each person was financially dependent on the deceased
- The wishes of the deceased as expressed in their beneficiary nomination
- The current financial affairs of each of the dependants and their earning respective earning potentials
- The death benefit amount available for distribution
- Other sources of income available to each of the dependants
- The competing financial needs of each dependant
Following the death of a member, the trustees effectively have twelve months in which to conduct their investigation and make a determination, keeping in mind that it can take time to identify and trace the member’s dependants. In making their determination, the trustees will use the following as a guideline:
Only dependants: If the member leaves behind only dependants and has not nominated any beneficiaries, the trustees will allocate the death benefits proportionately amongst the identified dependants in accordance with their findings.
Dependants and beneficiaries: Where the member has dependants and has nominated beneficiaries, the trustees will use the named beneficiaries as a guide when making their determination. As opposed to dependants, nominated beneficiaries qualify for consideration by virtue of the fact that their name has been listed on the nomination form, and they are not required to prove financial dependency. Having said that, the overriding factor will always be the beneficiary’s dependence on the deceased at the time of his death.
Only beneficiaries, no dependants found: In circumstances where no dependants can be found but where the member has nominated beneficiaries, the trustees must first determine whether the deceased’s estate has sufficient assets to settle its debt. If not, the death benefit must be used to settle the shortfall whereafter the balance (if any) may be paid to the beneficiaries as per the member’s apportionment. If the deceased’s estate is solvent, the trustees may pay the death benefit to the beneficiaries accordingly after a period of twelve months has passed.
No dependants, no beneficiaries nominated: Where the trustees find that there are no dependants and no nominated beneficiaries, they will need to wait for the expiration of the legislated twelve twelve-month period whereafter they may pay the death benefits over to the deceased’s estate.
As is evident from the above, retirement fund assets can add a layer of complexity to one’s estate planning and it is important to understand how these assets will be dealt with in the event of your premature passing.
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