Most people don’t realise what the different benefits are for the different investment products when it comes to estate planning, especially bearing in mind Estate Duty and Executor Fees. A key difference between pre-retirement products (like pension, provident, preservation and retirement annuity funds) and post-retirement products (like living annuities) is in how the death benefit is distributed: in pre-retirement products, the final decision rests with the trustees of the retirement fund, even though you can nominate beneficiaries, whereas in a living annuity you decide who receives the pay-out.
- Pension funds, provident funds, preservation funds and retirement annuity funds – The Pension Funds Act applies to all pre-retirement products and it states that although the deceased can nominate beneficiaries, the trustees of a retirement fund are responsible for allocating your benefits if you die before you retire. Trustees are required to perform the following three duties:
- Identify and find all of your dependants. Dependants are defined as spouses, children, anyone proven to be financially dependent on you at the time of death, anyone entitled to maintenance, as well as anyone who may in future become financially dependent on you.
- Decide how to divide the benefit based on an investigation. Your chosen ‘nominees’ will also be taken into account. A nominee is any party whose details you provided to your retirement fund in writing indicating that they should be considered by the trustees along with all the other qualifying dependants, for example, a dependant, or a person who is not a dependant, such as a friend. A nomination does not guarantee that the person will receive all, or a part, of the benefit.
- Decide how the benefit will be paid, for example, whether payment will be made directly to a dependant, to a legal guardian of a minor dependant, or a trust for the benefit for such dependant.
Although trustees aim to complete the process as quickly as possible, the Act gives them at least a year to search for dependants, and the process may take longer to finalise, for example when the deceased member left behind more than one family unit. During this time, the benefit is held in a money market fund. There are various options available to dependants and nominees in terms of how they can receive their benefit. They can decide on any of the following:
- transfer their benefit to an annuity
- take a cash lump sum (from which tax may be deducted)
- take a combination of a cash lump sum (from which tax may be deducted) and an annuity
- Living annuity – When you retire from your retirement fund you have the option of transferring your investment to a product that can provide you with an income in retirement, such as a living or guaranteed life annuity. One of the key features of a living annuity is that your investment can be left to your beneficiaries. This is in contrast to guaranteed life annuities which end when you die.
The death benefit from a living annuity is paid out to your nominated beneficiary/ies and can be taken as a lump sum payment, transferred to another living annuity or a combination of both. A cash payment triggers tax, but is calculated as being taxed in the hands of the deceased, although the first R500,000 may be tax free, dependant on if the deceased used their tax-free portion of up to R500,000.
- Endowments (local & offshore) – An endowment is an investment policy that caters for investors with a marginal income tax rate higher than 30%, and it is also a useful estate planning tool. This is quite a complex product in that it doesn’t have to come to an end when you die and it allows you to make various nominations. As the person investing in the Endowment, you will be known as the policyholder, or the owner of the investment. You can then make nominations, depending on your estate planning needs. You must decide who should be the ‘life assured’. The life assured is the person on whose life the endowment is issued. You can be the life assured, or you can nominate other people. The endowment comes to an end when the last life assured dies. You can also nominate beneficiaries to receive the investment. The beneficiary (or beneficiaries) for proceeds will receive the money from the investment when the last life assured dies. Your money will be paid out directly – i.e. the beneficiaries do not need to wait for the estate to be wound up. No executor’s fees will be paid on this amount, but it will form part of the estate for the calculation of estate duty. If no beneficiaries are nominated, your investment will be paid out to the estate and executor’s fees will apply.
- Tax-free investments – Tax-free investments, which allow you to save up to R33,000 per year and pay no tax on interest, capital gains and dividends have estate planning advantages if they are structured as a life policy, allowing you to nominate beneficiaries when you open your account. Your chosen beneficiaries will receive the proceeds of your Tax-free investment, and although it will be included in your estate duty calculation, there will be no executor fees payable.