Thinking about death is uncomfortable. But, trying to rebuild your life after the death of a loved one and dealing with questions of money is a stress that nobody should have to bear. As uncomfortable as it is to confront your own mortality, it is important to create a plan that provides for the financial needs of your loved ones. Thandi Ngwane explains.
Where to begin?
A good place to start is by writing your Will, if you haven’t already done so. You can do this yourself by downloading a standard template or with the help of your bank, attorney or financial adviser. Then make sure you understand the rules around estate planning and the claims process for your existing investments. There are some products that are specifically geared towards estate planning: familiarise yourself with what is available.
Products with estate planning advantages
Tax-free investments, which allow you to save up to R30 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, as is the case with the Allan Gray Tax-Free Investment (TFI). You may nominate beneficiaries when you open your account. Your chosen beneficiaries will receive the proceeds of your TFI once Allan Gray is notified of your death. TFIs form part of your estate duty calculation, but there are no executor’s fees and your beneficiaries get the money immediately.
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 Allan Gray 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 may apply.
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, whereas in a living annuity you decide who receives the payout.
Pension funds, provident funds, preservation funds and retirement annuity funds
The Pension Funds Act applies to all retirement funds and it states that 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:
1. 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.
2. 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.
3. 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 1) transfer their benefit to a living or guaranteed life annuity, 2) take a cash lump sum (from which tax may be deducted) or 3) take a combination of a cash lump sum (from which tax may be deducted) and a living or guaranteed life 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 contrasts to guaranteed life annuities that usually 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, although the first R500 000 may be tax free.
Unit trust investments do not require a beneficiary and the proceeds of your investment go to your estate when you die, which may mean that it is subject to estate duty. The South African Revenue Service charges a duty of 20% on estates valued above R3.5 million (after allowable deductions), which is subject to change from time to time according to legislation. The executor of your estate will distribute all your assets, including your unit trust investment, according to the provisions of your Will.
Foreign-currency investments via the Allan Gray offshore platform can be dealt with locally in the estate under a South African executorship. Your investment will not be subject to the administrative complications of estates law in offshore jurisdictions or require the appointment of an offshore executor, as is the case with many offshore-domiciled investments.
Top tips for estate planning
1. Keep your Will up to date. Your Will gives you the opportunity to decide what should happen to your estate assets after your death. If you die without a Will, the laws of intestate succession will apply.
2. Keep the beneficiaries of your endowments, TFI and living annuities up to date. This will ensure that the intended beneficiaries receive speedy payment of their benefits.
3. Keep your nominees’ details on your retirement funds up to date. This will enable the trustees to consider your wishes during their investigation into your circle of dependants at the time of your death.
4. Plan for immediate needs. Immediate needs, like funeral costs, may need money that your loved ones will not be able to access from your investments in time.
5. Talk to your beneficiaries, dependants and nominees. Half the task is preparing a plan, but it is just as important that you share your plan with the people who need to know. Make sure that they know the documents they will have to produce and complete after your death to make the process as seamless as it can be.
Investments are only one part of your estate planning. You might have other assets (such as property), as well as debt that also need to be accounted for in a holistic plan. A financial adviser can help you create a plan that works for you.