Is your estate plan truly secure? Do you know precisely where your assets will go? The answer often lies in the details, specifically, your beneficiary nominations. While estate planning in South Africa has many components, neglecting the clarity and accuracy of beneficiary designations can undermine your entire strategy. To prevent this from happening to you, let’s look at the importance of beneficiary nomination so you can see how it streamlines estate administration, reduces costs, and ensures your loved ones receive their inheritance without delay. Once we’re done, you’ll understand precisely why this critical element is not just a suggestion but an absolute necessity for a truly effective estate plan.
South African estate planning for advisors – the insider track on getting the beneficiaries right
Life insurance policies – naming beneficiaries
Life insurance is a vital tool in estate planning, offering the means to provide immediate financial support for beneficiaries and critical liquidity for the estate itself. However, the true potential of these policies hinges on careful beneficiary selection.
Designating your estate as the beneficiary is a typical strategy to ensure it has the necessary funds upon your death. However, be mindful that this means the policy’s value will be included in your estate’s total assets, triggering estate duty. Therefore, accurately calculating your life insurance needs must involve factoring in potential estate duty obligations.
Section 4(q) of the Estate Duty Act provides a significant benefit for surviving spouses in that assets, including life insurance proceeds received, are not subject to estate duty. This also applies when life insurance policies are formally incorporated into marital agreements with the spouse or children as beneficiaries.
A direct beneficiary designation can lead to complications for those looking to provide for minor children through life insurance policies. Due to legal limitations on minors inheriting, direct payouts often end up under the supervision of the Guardian’s Fund or a Beneficiary Fund.
A more streamlined approach is to create a testamentary trust through your will and designate this trust as the beneficiary. This ensures the life insurance proceeds are managed by your chosen trustees, protecting and administering the funds for your children until they reach a predetermined age.
Tax-free investments – don’t forget to nominate beneficiaries.
Your ability to nominate a beneficiary on a tax-free investment or savings account depends on the nature of the investment. Where the tax-free investment is operated under a life license, you can nominate beneficiaries on the investment, which means that, in the event of your death, the proceeds will be payable to your beneficiaries immediately. The asset’s value will not be included in the calculation of the executor’s fees.
On the other hand, if your tax-free investment is housed on a LISP platform, there is no mechanism to nominate beneficiaries, and the funds held in this investment should be dealt with according to your will.
Read more: Need to appoint an executor in SA? Expats, let’s talk about fees!
Endowments – created with beneficiaries in mind
Endowments offer a more nuanced approach to estate planning for those operating within higher income tax brackets. Their complexity gives rise to significant advantages, especially when multiple life assured are involved. A key feature of endowments is their longevity; they remain active until the passing of the last designated life assured, which allows for a range of estate planning goals to be met.
The policyholder determines the life assured, and beneficiaries only receive their designated shares upon the final life assured’s death. This direct payout to beneficiaries avoids the executor’s fees, although the endowment’s value is factored into the estate for estate duty purposes at the time of the owner’s demise.
Retirement products – dependents trump nominations
Retirement funds offer significant tax and estate planning benefits, including provident, pension, preservation, and retirement annuity funds. However, Section 37C of the Pension Funds Act dictates the distribution of these funds upon death, overriding beneficiary nominations.
Fund trustees are ultimately responsible for distributing benefits equitably among the deceased’s financial dependents. This requires a thorough investigation to identify all potential dependents, including spouses, children, elderly parents, siblings, and anyone financially reliant on the deceased. As such, while your nominations are considered, they serve only as a guide. Once the distribution is determined, beneficiaries can transfer their share into an annuity, receive a lump sum, or a combination.
Section 37C prioritises financial dependents to prevent destitution after the policyholder’s passing, meaning nominated beneficiaries are not guaranteed any portion. Trustees must identify and locate these dependents, which can be time-consuming. They have up to twelve months to complete their investigation and distribute the benefits, and this extended timeframe must be considered during your estate planning.
Living annuities – intended to pass to your named beneficiaries
Unlike regular retirement funds, you can choose who gets your living annuity money after your death. This differs from guaranteed (life) annuities, which usually stop paying out after passing.
When you die, the money in your living annuity goes straight to your nominated beneficiaries, bypassing your estate. This means it gets to them without delay and usually avoids estate taxes as long as your original retirement savings were tax-deductible.
Your beneficiaries can then take the money as a lump sum, move it to their living annuity or do a mix of both. If you haven’t already taken out much money before your death, the first R500,000 might still be tax-free for them. If so, your beneficiaries should take that amount as cash and put the rest into their living annuity.
Business assurance policies – beneficiary details matter
Usually, life insurance payouts are included in a person’s estate for tax purposes. However, business policies are different if they are set up correctly. To avoid estate duty, a “buy and sell” policy must be owned by a business partner to buy the deceased’s share of the business. Also, the deceased must not have paid the policy premiums.
Similarly, “key person” insurance can be exempt from estate duty. This applies if the company owning the policy is not a family business related to the insured person, pays the premiums, and is the beneficiary.
Other investments – estate planning handled through your will
Investments like unit trusts don’t allow beneficiary nominations. When you die, these assets will go into your estate and be subject to executor’s fees. Foreign investments should be handled through your South African will. Your estate’s executor will then distribute these assets according to your will.
FinGlobal: cross-border financial specialists for expats
Effective estate planning in South Africa hinges on beneficiaries’ accurate and strategic nomination. From minimising estate duty to ensuring timely asset distribution, these designations are vital. Review your policies, update your nominations, and seek professional guidance to solidify your estate plan and protect your legacy. Looking for further specialist financial services? FinGlobal also offers retirement annuity withdrawal, tax emigration, and more to South Africans all over the globe. To learn more about how FinGlobal can streamline your international finances, leave your contact details in the form below, and we’ll get in touch!