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How investments are distributed upon death

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There are many aspects to consider when creating a comprehensive financial plan. The most common area of focus is generally related to the structure, returns and tax efficiency of investments during one’s lifetime, but with little emphasis on what happens to the investments upon death.

It is important to understand how your investments will be distributed upon death and the typical time frame for distribution. Knowing and planning for these factors provides a basis to ensure that dependents will be looked after according to your wishes, and that they do not incur any liquidity issues whilst your estate is being wound up.

Below we provide a summary on how different investment vehicles are treated upon death and the options available to beneficiaries.

Retirement Annuities, Pension Funds, Provident Funds and Preservation Funds

Retirement annuities, pension funds, provident funds and preservation funds allow for beneficiary nominations, however, the beneficiary nomination is merely a guideline for the trustees of the fund.

A beneficiary nomination will not always be executed as per the stipulated nomination, as the trustees of the fund will investigate and determine all dependents of the deceased and will distribute the benefit as they deem appropriate. The trustees would need to consider for example, if the deceased has specified a spouse and child/children as beneficiaries, and whether there are other unspecified dependents who bear consideration.

The trustees’ process of determining the appropriate distribution can take up to 12 months and once established the beneficiaries will have three options:

  1. The beneficiary can elect to transfer the full benefit to a living annuity or life annuity. The transfer to the selected annuity will be exempt from tax, however, the income that is received from the annuity will be taxable at the annuitant’s personal income tax rate.
  2. The beneficiary can elect to receive their full benefit in cash. The cash benefit will be taxable according to the retirement tax table and will be taxable in the hands of the deceased. This rate of tax is up to 36%.
  3. The beneficiary can elect to take a combination of option 1 and 2 and the same taxation rules will apply.

Living Annuities

A living annuity allows for beneficiary nominations with benefits being distributed once the beneficiaries have notified the fund administrator of their wishes, and therefore, the distribution becomes available immediately. A beneficiary will not have to wait for trustees of the fund to determine an appropriate distribution and they can elect to receive their benefit in one of the following ways:

  1. The beneficiary can elect to transfer the full benefit to a living annuity or life annuity in their own name. The transfer to the selected annuity will be exempt from tax, however, the income that is received from the annuity will be taxable at the annuitant’s personal income tax rate.
  2. The beneficiary can elect to receive their full benefit in cash. The cash benefit will be taxable according to the retirement tax table and will be taxable in the hands of the deceased. This rate of tax is up to 36%.
  3. The beneficiary can elect to take a combination of option 1 and 2 and the same taxation rules will apply.

Discretionary Investments

A discretionary investment such as a normal unit trust account, savings account or a share portfolio will be distributed as per the wishes specified in your last will and testament. Discretionary investments form part of the dutiable estate and will only be distributed once the estate has been wound up by the executor, which can take 12+ months.

Tax-Free Savings Account (TFSA)

There are two types of TFSAs available in South Africa. Most commonly, a TFSA is offered as a discretionary investment where there is no beneficiary nomination. In this case, the investment will be paid out in cash and distributed as per the wishes specified in your last will and testament. A discretionary TFSA will form part of the dutiable estate and will only be distributed once the estate has been wound up. The benefit can therefore take 12+ months to be distributed.

Some TFSAs are offered through a life investment company where beneficiary nominations are available. In this instance, the beneficiary will receive the benefit in a more timeous manner where they can elect to receive the full benefit in cash (subject to estate duty) or continue making contributions to the account.

Endowment

An endowment is similar to life insurance in the sense that there is a life assured and a beneficiary nomination. Upon death of the life assured, a beneficiary will have the option to either receive the benefit in cash or they can elect to take ownership of the endowment. The options available to the beneficiary are instant and therefore can be distributed in a timeous manner.

Conclusion

  1. Ensure that your will is up to date so that your wishes are executed correctly. In the absence of a current will, your assets may be distributed in a manner that may not have been your intention.
  2. Ensure that your beneficiary nominations are correct and up to date.
  3. Consult with a qualified financial planner to assist in structuring your investments in the most appropriate manner for both before and after death.

Investonline has highly advanced financial planning tools that enable us to build comprehensive financial plans with clients in real-time. We guide clients through different financial planning aspects such as planning for their lifestyle goals, ensuring investments are structured correctly, tax-efficiency and we assist with drafting or updating wills. Click here to speak to one of our qualified financial planners.

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