Estate planning is often associated with wills, trusts, tax calculations and executor’s fees, yet one of the most important estate planning tools is also one of the simplest: the beneficiary nomination form. While it may appear to be a routine administrative document, a beneficiary nomination can materially affect how quickly your loved ones receive money after your death, whether certain assets fall into your estate, how costs are calculated, and whether your intentions are carried out as intended. In our experience, beneficiary nominations are often completed when a policy or investment is first taken out and then forgotten, despite marriage, divorce, the birth of children, changes in family circumstances, business restructures and shifts in financial dependency. As such, a regular review of your beneficiary nominations should form an integral part of your broader estate planning process.

Life policies

Life policies can be highly effective estate planning tools, particularly where they are used to provide liquidity in an estate, settle debt, create financial security for dependants or fund a buy-and-sell arrangement. However, their effectiveness depends largely on how the policy is structured and who is nominated as beneficiary. If the purpose of the policy is to provide liquidity in your deceased estate – for example, to pay estate duty, capital gains tax, executor’s fees, bond debt or other estate expenses – it may be appropriate to nominate your estate as beneficiary. In this case, the insurer pays the proceeds into your deceased estate, where the funds can be used by the executor to meet estate liabilities. Bear in mind, however, that the proceeds of a domestic life policy are generally regarded as deemed property in your estate for estate duty purposes, even if paid directly to a nominated beneficiary, although certain deductions and exclusions may apply.

Note that where your spouse is nominated as beneficiary, the proceeds may qualify for the section 4(q) deduction in terms of the Estate Duty Act, meaning that the value passing to a surviving spouse is deductible from the dutiable estate. This can be a useful estate planning mechanism, although it should not be viewed in isolation. Liquidity, tax, marital regime, maintenance needs and the structure of the surviving spouse’s own estate should all be considered before deciding who should receive the policy proceeds.

Importantly, special care should be taken when minor children are intended beneficiaries. While it may feel natural to nominate your children directly, children under the age of 18 have limited legal capacity to receive and manage money in their own names. In the absence of appropriate trust provisions, funds intended for minor children may be paid to the Guardian’s Fund or otherwise administered in a way that may not align with your wishes. A more effective solution is often to set up a testamentary trust in your will and nominate that trust as beneficiary of the policy. In this way, the proceeds can be paid into the trust and administered by your nominated trustees for the benefit of your children until they reach an age that you have predetermined.

Tax-free investments

Tax-free investments are another area where beneficiary nominations require careful attention. Where a tax-free investment is structured through a life wrapper, you may be able to nominate beneficiaries, in which case the proceeds can be paid directly to them on your death. This can reduce delays and may avoid executor’s fees on that asset. However, where the tax-free investment is held on a LISP platform, beneficiary nomination is generally not available and the investment must be dealt with in terms of your will. It is therefore important not to assume that all investments allow for beneficiary nominations, as the underlying structure determines how the asset will be dealt with on death.

Endowments

Endowments are often misunderstood but can be useful estate planning vehicles, particularly for investors whose marginal tax rate is higher than the tax rate within the endowment structure. They can also offer planning flexibility because the policyholder can nominate lives assured and beneficiaries. Importantly, the policy does not necessarily terminate on the death of the policyholder if there are remaining lives assured, which means the investment can continue after death if structured correctly. Beneficiaries will generally only receive the proceeds when the policy terminates, typically on the death of the last life assured – although they can pay earlier, depending on the structure. From an estate planning perspective, beneficiary nominations on endowments can assist in avoiding executor’s fees and expediting payment, although the value may still be deemed property in the estate of the policyholder for estate duty purposes.

Retirement funds

Retirement funds – including pension, provident, preservation and retirement annuity funds – are governed by a very different set of rules. Unlike life policies or discretionary investments, you cannot simply decide who will receive your retirement fund death benefit by completing a nomination form. In terms of section 37C of the Pension Funds Act, the trustees of the fund are legally responsible for identifying your dependants and nominees and distributing the benefit in a manner they deem equitable. This means that your beneficiary nomination is important, but it is not binding on the trustees.

The trustees must investigate your personal and financial circumstances, identify anyone who was legally or financially dependent on you, and consider the needs of those dependants before making a decision. This can include a spouse, minor or adult children, aged parents, former spouses, siblings or any other person who can demonstrate dependency. Your nomination form provides valuable guidance, but it does not override the trustees’ duty to allocate the benefit fairly. This is one of the reasons why it is so important to keep your retirement fund beneficiary nominations updated and to ensure that they reflect your current family structure and financial responsibilities.

Living annuities

Unlike pre-retirement retirement fund benefits, which are governed by Section 37C of the Pension Funds Act, living annuities allow the annuitant to nominate beneficiaries directly. As such, the trustees of the originating retirement fund are no longer responsible for allocating the benefit on death. Where valid beneficiaries have been nominated, the remaining value of the living annuity is paid directly to them and does not form part of the deceased estate for administration purposes. This allows the proceeds to be transferred to beneficiaries without being subject to executor’s fees and without the delays typically associated with winding up a deceased estate.

From an estate duty perspective, living annuities are generally not subject to estate duty. However, if no beneficiaries have been nominated and the proceeds are paid to the deceased estate, executor’s fees may apply. The tax outcome for beneficiaries will depend on how they elect to receive the proceeds — whether as a lump sum, as an income stream via a living annuity in their own name, or as a combination of both. Lump sums are taxed according to the retirement fund lump sum death benefit table, while annuity income is taxed in the hands of the beneficiary at their marginal tax rate.

Business assurance policies

Business assurance policies require particularly careful structuring. While life policy proceeds are generally deemed property in a deceased estate, correctly structured buy-and-sell policies and key person policies may qualify for estate duty exemptions. In the case of a buy-and-sell policy, the policy must generally be taken out by a co-owner of the business for the purpose of purchasing the deceased owner’s share, and the deceased must not have paid the premiums. For key person assurance, the policy must be owned by the business, the business must pay the premiums and be nominated as beneficiary, and specific requirements must be met for estate duty exemption. These arrangements should be reviewed regularly to ensure that ownership, premium payments, beneficiary nominations and buy-and-sell agreements remain aligned.

Discretionary investments

Discretionary investments, such as unit trust portfolios, do not generally allow for beneficiary nominations. These assets will fall into your deceased estate and be distributed in terms of your will, subject to estate administration, executor’s fees and any applicable taxes. The same is generally true for local discretionary investments held in your own name. Indirect offshore investments can often be dealt with in your South African will, although direct offshore assets may require separate offshore estate planning depending on the jurisdiction and asset type. This is where integrated financial planning becomes important, as your will, investment structures, tax position and beneficiary nominations should all speak to one another.

The key takeaway is that beneficiary nominations should never be treated as once-off paperwork. They should be reviewed after every major life event, including marriage, divorce, the birth or adoption of children, the death of a loved one, retirement, emigration, business changes or any material shift in financial dependency. It’s imperative that your policies, investments, retirement funds, business interests and beneficiary nominations work together if your estate plan is to be practical, efficient and capable of achieving its intended purpose. Ultimately, the value of good estate planning lies not only in deciding who should inherit from you, but in ensuring that your loved ones receive what you intended, in the most appropriate manner, with as little uncertainty, delay and unnecessary cost as possible.

Have a fabulous day.

Sue