An important part of estate and succession planning is ensuring that your beneficiary nomination accurately reflects your wishes and allows for no confusion when it comes to administering your estate. Depending on the nature of the policy or investment, an estate planner can use beneficiary nomination to reduces estate costs and ensure that his loved ones receive their inheritance efficiently and without delay.
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 efficiency is very much dependent on correct beneficiary nomination. For instance, if the purpose of the life policy is to provide liquidity in your estate in the event of death, it is advisable to nominate your estate as the beneficiary to the policy. In the event of your death, the insurer will pay the proceeds directly to your deceased estate. However, remember that the proceeds of a life policy are considered deemed property in your estate and will be subject to estate duty. As such, it is important to include your potential estate duty liability when calculating the quantum of life cover you need to ensure estate liquidity.
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. 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.
If your intention is for the proceeds of your life policy to be paid to your minor beneficiaries, think carefully about naming them as beneficiaries on your policy. In terms of our succession laws, children under the age of 18 are limited in how they can receive their inheritance. For instance, a lump sum bequeathed directly to them will – in the absence of a testamentary trust – be housed and administered by the Guardian’s Fund or a Beneficiary Fund. The most effective way of ensuring that your minor children receive the proceeds of a life policy is to set up a testamentary trust in terms of your Will, and to nominate the trust as beneficiary on the policy. In the event of your death, the insurer will pay the proceeds directly into the trust where the funds will be administered by your trustees in the best interest of your minor children until they reach a pre-determined age.
If you have a tax-free investment in place, you are able to nominate beneficiaries on your account. In the event of your death, the proceeds will immediately be paid directly to your nominated beneficiaries and the value of the investment will not be included for the calculation of executor’s fees.
Endowments are, generally speaking, complex structures and are useful estate planning tools for those with a marginal income tax rate of 30% or more. Because endowments can remain active after your death where multiple life assureds are nominated, these vehicles can be used to achieve a number of estate planning goals. As the policyholder, you can decide who the life assured is, with the policy only coming to an end on the death of the last life assured. Similarly, any beneficiaries that you have nominated on your endowment will only receive their benefit on the death of the last life assured. When the proceeds become payable on the death of the last life assured, the funds will be paid directly to the beneficiaries. Again, the use of beneficiary nominations can avoid paying executors fees but the value of the funds will be considered deemed property in your estate for estate duty purposes on the passing of the owner.
While retirement funds, including provident, pension, preservation, and retirement annuity funds, provide investors with significant tax and estate planning benefits, it is important to keep in mind the limitations that Section 37C of the Pension Funds Act imposes on these vehicles in respect of distribution in the event of death.
In terms of legislation, it is the trustees of each retirement fund that are responsible for deciding how a deceased’s retirement benefits will be distributed, with the focus being on ensuring that the proceeds are distributed equitable amongst the deceased’s financial dependants. As such, the trustees are required to undertake a process of identifying all the deceased’s dependants – including spouses, children, aged parents, siblings, and anyone else who is entitled to maintenance or who can be considered, wholly or in part, financially dependent on the deceased. In making a determination, the fund trustees will take into account the beneficiaries that you nominated on your policy, although this will only be used as a guide. Once the award has been made, the beneficiaries have the option to transfer their benefit into a living or life annuity, make a lump sum withdrawal, or a combination of both.
Unlike retirement funds whose distributions are subject to Section 37C of the Pension Funds Act, member owned living annuities are free to nominate beneficiaries to their investment. In this regard, living annuities differ from guaranteed life annuities which, generally speaking, die upon the death of the policyholder. Importantly, in the event of your death, the funds in your living annuity will not form part of your deceased estate and, as such, will be almost immediately available to your beneficiaries. This means that, where you have nominated beneficiaries to your living annuity, the funds will not be subject to estate administration and no estate duty will be charged, assuming all initial contributions to the retirement fund qualified as a tax deduction. Your beneficiaries can choose whether to withdraw the funds as a lump sum, transfer the funds to another living annuity, or a combination of both. As the first R500 000 may be tax-free, depending on whether the deceased has made any previous withdrawals, making a lump sum tax-free withdrawal and transferring the balance into a living annuity in their own name may be an appropriate option for your beneficiary.
Business assurance policies
While, generally speaking, the proceeds of life insurance policies are considered deemed property in a deceased estate, the proceeds of business assurance policies are an exception to the general rule – provided that the policy is correctly structured. To qualify for an estate duty exemption, the buy and sell 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 the premiums must not have been paid by the deceased. A similar exemption is provided in respect of key person assurance where, in order to be exempt from estate duty, certain criteria must be met. Firstly, the company that owns the policy must not be a family company in relation to the person’s whose life is insured. Further, the company in question must pay the premiums and must be the nominated beneficiary on the policy.
Your discretionary investments, such as a unit trust portfolio, do not have the option of using a beneficiary nomination and the proceeds of these investments will be paid directly into your estate in the event of death. As such, they will be subject to executor’s fees. Your indirect foreign investments should, generally speaking, be dealt within your South African Will. The executor of your estate will then distribute the proceeds of these investments as per the provisions in your Will.
Estate planning can be complex, and understanding the role that your beneficiary nominations play in the overall structuring of your estate is vital to give full effect to your intentions.
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