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What happens to your investments when you die?

It is important to understand what happens to your assets when you pass on so that you are able to invest in investments that will ensure your beneficiaries receive maximum benefits.

In the financial industry, we often come across clients asking what would happen to their investments when they die? Below we have explained what happens to each investment that you may have.

Retirement funds (retirement annuities, pension funds and preservation funds)

While you are alive you will be the sole beneficiary of its benefits. However, if you were to pass away before accessing your retirement annuity benefits, the fund value becomes payable as a death benefit. The death benefit is the market value of the investment less fees and charges. This amount is not determined by the date of death or the date of notification of death but is determined once all the funds are switched into an interest-bearing fund and all applicable fees and charges have been deducted.

Retirement products are governed by the Pension Funds Act. Every retirement fund has a board of trustees, which is responsible for making sure the fund is well-governed and that members’ best interests are protected. One of the roles of the trustees is to ensure that your benefit is distributed fairly.

When it comes to distributing the benefits, preference is given to dependency. The act defines dependants as spouses (which include permanent life partners), children, anyone proven to have been financially dependent on you at the time of death, as well as those who may in the future have become financially dependent on you.

Beneficiaries are entitled to choose whether to receive their benefit as a cash lump sum, use it to purchase a compulsory annuity or a combination of the two. It is a good idea to warn your beneficiaries about the tax implications if they choose to take a cash lump sum.

Living annuities

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 nominated beneficiaries.

Once the service provider is notified that you have passed on, they will automatically block the investment and switch the fund value into an interest-bearing fund once all applicable fees and charges have been deducted.

The beneficiaries will also be entitled to choose whether to receive their benefit as a cash lump sum, use it to purchase a compulsory annuity or a combination of the two.

Unit trusts

In terms of the rules, a unit trust is different from a retirement fund and living annuity. There are no beneficiaries nominated in a unit trust. The funds of the unit trust will go to your estate when you die which means that it is subject to estate duty. The funds will only be released to your beneficiaries as per your will when the estate is settled. If the funds are paid to your spouse, there will be no tax implications but if it is to your children or a third party there will be tax implications.

Once the service provider is notified of your death, the unit trust will be blocked so no further transactions can take place but your unit trust will continue to perform based on market conditions. The final value of the unit trust will only be determined once the estate is settled.

Tax-free investments

Your beneficiaries will receive the proceeds once the service provider is notified of your death. We just need to remember that tax-free investments form part of your estate but there are no executor’s fees.

Endowments

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.

When investing in an endowment, you will be known as the policyholder or the owner of the investment. You, as the policyholder must decide who should be a life assured. The life assured is the person on whose life the endowment is issued. You can nominate yourself and other people. The endowment ends when the last assured dies.

A beneficiary can be nominated. The beneficiary will only receive the funds when the last life assured dies. The funds will be paid out directly to the beneficiaries and they do not need to wait for the estate to be wound up. The endowment will form part of the estate for the calculation of estate duty but there will be no executor’s fee.

Although death is the last thing we think about, we need to plan for it as it is something that will happen to each and every one of us and when it happens, we want to be sure that our loved ones will be well taken care of. It is important to understand what happens to your assets when you pass on so that you are able to invest in investments that will ensure your beneficiaries receive maximum benefits.

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Michael Haldane

Global & Local The Investment Experts

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