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How your investments are dealt with when you die

Whether an asset falls within your deceased estate and how it is dealt with if it does depends largely on the type of asset, the jurisdiction in which it falls, and the nominated beneficiaries.

Many people mistakenly believe that their will directs the distribution of all their assets in the event of death, but this is not the case. Whether an asset falls within your deceased estate and how it is dealt with if it does depends largely on the type of asset, the jurisdiction in which it falls, and the nominated beneficiaries.

In this article, we take a look at six types of investments and what happens to them in the event of death.

Living annuities

When it comes to planning your estate, living annuities make excellent succession planning tools. When setting up your living annuity, you are free to nominate your beneficiaries as you wish and, in the event of death, the funds will be made available to them almost immediately – although your beneficiaries will need to notify the fund administrator how they wish to receive their benefits. Your beneficiaries will have the option of taking a lump sum withdrawal, transferring the funds to a living annuity in their own name, or a combination of these two options, keeping in mind that up to the first R500 000 may be tax-free depending on the decease’s retirement history. Your beneficiaries will not pay tax when transferring the full benefit to a living or life annuity in their own name, but any income received from the annuity will be taxed as per their personal income tax rates. The proceeds of a living annuity will not form part of your deceased estate, are not estate dutiable, and are not subject to executor’s fees.

Retirement funds

Retirement funds, including pension, provident, preservation and retirement annuity funds, are all governed by the Pension Funds Act, and the manner in which these assets are dealt with on death is strictly governed by this legislation, specifically Section 37C. At the outset, it is important to understand that retirement funds are government-incentivised funding structures designed to encourage South Africans to save for their retirement and, in doing so, alleviate the burden on the state. Because of the significant tax benefits of investing in retirement funds, the government aims to ensure that the death benefits are distributed to those who are financially dependent on the fund member in the event of death. As such, Section 37C directs the retirement fund trustees to determine who is financially dependent, either wholly or in part, on the member and, based on their investigation to apportion the funds accordingly.

Those who qualify as ‘financial dependant’ can include the fund member’s children, spouse, siblings, aged parents or anyone who is in some way dependent on the deceased at the time of their death. As the member’s death benefits are paid directly to their financial dependants, the funds do not form part of the estate and are not included when calculating the deceased’s estate duty. Further, as the executor does not need to administer these funds, no executor’s fees are payable. While money held in retirement funds is generally protected from the deceased’s creditors, keep in mind that this protection does not extend to tax owed to Sars and/or maintenance claims.

Endowments

Endowments are complex investment policies that generally cater for investors with a marginal tax rate of 30% or more and can also make useful estate planning tools. As the policyholder, you can elect who the life assured will be and nominate beneficiaries to the policy, depending on your estate planning needs. Generally speaking, the proceeds of an endowment policy are paid out on the death of the last life assured, with the policies being payable immediately. Although not part of the winding-up process, the proceeds of an endowment policy are considered deemed property in a deceased estate and will be subject to estate duty. However, as the executor is not responsible for the administration or distribution of these funds, no executor’s fees are payable on the proceeds.

Tax-free investments

When opening a tax-free savings account (TFSA), you are able to nominate your beneficiaries when completing the application form. In terms of the Estate Duty Act, the deposits and all returns earned in your TFSA will form part of your deceased estate and will be taken into account for the purposes of calculating estate duty. Whether or not you can nominate a beneficiary to your tax-free investment depends on the nature of the vehicle. If your tax-free investment is life-wrapped, you can nominate a beneficiary which means that the proceeds, while forming part of your deceased estate, will be paid directly to your beneficiaries and will bypass the winding-up process and avoid executor’s fees. On the other hand, if your tax-free investment is housed on a LISP platform, you will not be able to nominate a beneficiary and will need to stipulate in your will as to what should happen to these funds. These funds will be estate dutiable and subject to the estate administration process which means that your loved ones may have to wait for the proceeds. Further, as these funds will be administered by your executor, it is likely that they will attract executor’s fees. While the investment is held within the estate, the returns on it will remain exempt from income tax, dividends tax and capital gains tax.

Unit trusts

Unit trusts or collective investments are discretionary investments housed on LISP platforms and regulated by the Collective Investment Schemes Control Act of 2002. Unit trusts can play an important role in your portfolio especially when it comes to providing liquidity in your retirement years. When opening up a unit trust portfolio, you do not need to nominate a beneficiary as the proceeds of this type of investment fall within your estate and are therefore estate dutiable. In the event of your death, your executor will provide the relevant LISP platform with a copy of your death certificate following which no further transactions will be able to take place, although your investment will continue to generate market returns depending on market conditions. As such, it is advisable that you stipulate in your will how you would like these proceeds to be distributed, keeping in mind that executor’s fees are payable on these funds.

Offshore investments

The manner in which your offshore investments are structured will determine how they will be dealt with in your deceased estate. If you are invested indirectly offshore through a rand-denominated feeder fund on a local LISP platform, these funds will form part of your deceased estate and you should deal with the distribution thereof in terms of your South African will. However, if you are invested directly in a foreign-domiciled fund, you may need to seek estate planning advice on how these funds will be dealt with in the event of your death, and this will largely depend on which jurisdiction you are invested in.

While generally speaking, your South African will deal with the distribution of your worldwide assets, there are certain circumstances – such as direct ownership in shares in a foreign company – which may require that you have a foreign will drafted. Keep in mind that each country has its own set of succession laws, and it is important to know how these laws affect you if you are invested directly in a foreign country.

Further, some countries, such as those in civil law jurisdictions, have what is referred to as mandatory succession rights which limit one’s freedom of testation. It is also important to understand whether South Africa has entered into a double-taxation agreement with the foreign jurisdiction in which you are invested as, in the absence of such agreement, you may be liable for additional estate and inheritance taxes.

Investment Type Beneficiary Estate Duty Executor’s Fees Comments
Endowments Nominated beneficiary Yes No After the death of the last life insured
Living Annuities Nominated beneficiary No No Only tax-deductible portion
Retirement Funds Financial dependants No No Section 37C of the Pension Funds Act
Tax-Free Investments Nominated beneficiary or Estate Yes Variable  
Unit Trusts Estate Yes Yes  
Offshore Investment Estate Yes Yes  

 

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Gareth Collier

Crue Invest (Pty) Ltd

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Very interesting article, thanks!

Say you had R11m equity nest egg, you sell it, then after paying CGT you put R10m in a living annuity. Assume you draw down the absolute minimum annually. That draw is taxed as normal income, right? You are not taxed on the difference between growth of the living annuity minus the annuity you draw? You nominate beneficiaries. You die (unfortunately). The capital in the living annuity is entirely excluded from your estate duty, the beneficiaries pay tax as normal income on that minimum withdrawal, and they in turn can do the same with nominating beneficiaries of the now-their living annuity?

After admin the living annuity would be paying the beneficiaries potentially the same month as your departure?

Can that living annuity have multiple beneficiaries (say spouse and kids in whatever ratio) and would they each be able to draw that R500k lump sum?

There has to be a catch?

End of comments.

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