If you have one or more policies in place, ensuring that you have appropriately nominated your beneficiaries and that your beneficiary nominations remain relevant to your needs as and when your circumstances change over time, remains an important part of the estate planning process. However, there are several intricacies when it comes to selecting your beneficiaries which should first be considered, beginning with understanding your intentions for the proceeds of the policy. Here’s what to consider:
Your intentions
Before nominating a beneficiary to your policy, it is important to take a holistic view of your estate plan so that you are clear on what you hope to achieve through the nomination process. Do you want to provide financially for a loved one in the event of your death? Do you want to ensure that your loved ones have immediate access to funds in the event of your untimely passing? Do you want to create liquidity in your estate? Do you want to make provision for minor children? Do you have a special needs child that needs to be cared for if you are no longer around? Your estate planning intentions are critical to mapping out the beneficiary nomination process while taking an all-inclusive view of the policies you have in place.
The type of policy
The type of policy you have in place, together with the applicable regulations, will impact both your beneficiary nomination and the policy’s payout, so it is important to understand the nature of each policy you have in place. Various types of policies may include:
Life insurance: Nominating beneficiaries to your personal life insurance policies will, once again, depend on your intentions. If you nominate your spouse and/or children as beneficiaries of your policy, the proceeds will be paid directly to them following your death and, as such, is a great way to ensure that they have access to capital while your estate is being wound up. Remember, the proceeds of such a policy will still be regarded as deemed property in your estate and are therefore estate dutiable. However, keep in mind that a policy recoverable by a surviving spouse or child under a registered ante- or post-nuptial contract will qualify for a deemed property exemption. In choosing your beneficiaries, keep in mind that you can select multiple beneficiaries and can indicate how the payout should be divided between them. When initiating the policy, you will be required to nominate your beneficiaries, failing which your estate will be the nominated beneficiary and, in the event of your passing, the proceeds will be paid into your estate where they will form part of your dutiable estate. It is therefore critical to contemplate how you intend the proceeds of the policy to be used before nominating your beneficiaries.
Living annuity: As the owner of a living annuity, you are free to nominate beneficiaries to such a policy and, in doing so, will ensure that your loved ones receive swift access to the capital. Nominating beneficiaries to your living annuity means that the assets will not form part of your dutiable estate – provided that all contributions to the retirement fund qualified as a tax deduction. As beneficiaries of your living annuity, your loved ones can choose to make a full lump sum withdrawal, transfer the capital to another living annuity, or implement a combination of a withdrawal and living annuity. That said, keep in mind that in terms of Section 10c of the Income Tax Act, if a contribution to a retirement annuity did not qualify for a tax deduction and now forms part of a living annuity, where the beneficiary retains the living annuity, it does not form part of the estate – but if and when it is cashed in, it does form part of the estate.
Retirement funds: If you contribute to an approved retirement fund, either in your personal capacity or through your employment, it is important to be aware that the distribution of these benefits is governed by Section 37C of the Pension Funds Act. In terms of this legislation, your beneficiary nomination will be used as a guide by the fund trustees, whose function is to distribute the death benefits equitably amongst your financial dependants. Financial dependency is key to the trustees’ determination and, in reaching their decision, they are required to perform an in-depth investigation to establish exactly who is financially dependent on you, either wholly or in part, and to share the proceeds amongst your financial dependants accordingly, keeping in mind that the determination process can take up to a year to complete. As such, be cautious of relying on your retirement funds to provide cash flow for your loved ones in the event of your passing.
Unapproved benefits: If you have unapproved group life benefits in place through your employer, make sure that you have nominated beneficiaries to your policy if that is your intention. While, previously, in the absence of a beneficiary nomination, your employer could determine to whom the proceeds should be distributed, this is no longer the case. In the absence of a beneficiary nomination, the proceeds will automatically be paid into your estate, which could adversely affect your loved ones. If you’re unsure whether you have nominated beneficiaries to your group life policy, check with your HR department and make adjustments where necessary.
Buy-and-sell policies: While the proceeds of domestic life insurance policies are considered deemed assets in a deceased estate, business assurance policies are one of a few exceptions to this rule provided they are correctly structured. In structuring a buy-and-sell policy, the policy must be taken out by the shareholders of the business for the purposes of buying the deceased or disabled shareholder’s shares, the deceased must not have taken out the policy or paid any premiums, and the shareholders must be shareholders at the time of the deceased’s death.
Minor and special needs beneficiaries
Before nominating a minor child as beneficiary to a policy, it is important to understand the legal ramifications of doing so, as the result could be contrary to your intentions. Remember, a minor – being anyone under the age of 18 – does not have contractual capacity and, as such, the proceeds may be paid to the minor’s guardian in the event of your death. If the minor has no legal guardian, the proceeds will be paid into the state-run Guardian’s Fund where they will be administered on his/her behalf until the minor reaches age 18. To prevent such a situation from arising, you may want to consider setting up a testamentary trust for the protection of assets intended for your minor beneficiaries. A testamentary trust structure can similarly be used to house assets intended for the benefit of a special needs child who is incapable of managing his/her own affairs, keeping in mind that this type of trust has additional tax advantages. In structuring your policy, you would need to nominate the testamentary trust as the beneficiary to ensure that, upon your death, the proceeds would be paid directly to the trust, of which your minor beneficiaries are named beneficiaries.
Your will
It is important to bear in mind that the act of nominating a beneficiary to a life policy does not remove the asset from your deceased estate. The nomination process is designed to ensure that the proceeds are paid directly to a specific person or entity in the event of your death and, subject to a few exceptions, the proceeds of a domestic life policy will be considered deemed property in your estate. Avoid making mention of your policies in your last will and testament as this can create confusion and delays.
Reviewing your nominations
Regular and ongoing review of your beneficiary nominations is critical to the success of your estate plan, so be sure to review your beneficiaries at least annually or as and when there is a major change in your personal circumstances such as marriage, divorce, death, or birth.
Have a fantastic day.
Sue
