Where your investments go when you die

YOU probably assume that when you die your assets will be distributed according to the stipulations in your will. But it doesn’t always work that way. Some assets may be transferred directly, while others must first become part of your estate. People can also claim the debt you owe them from your estate. After deductions, your loved ones might walk away with little, which is why you should speak to a financial planner.

1 LIFE INSURANCE POLICY

This money should be paid directly to beneficiaries named in the policy. It isn’t part of the estate administration, so executor fees aren’t charged. But estate duty is sometimes levied on life-insurance policies – it depends on who you leave them to. Surviving spouses usually don’t pay taxes if it’s left to them but other beneficiaries might have to. If you don’t appoint beneficiaries, it becomes part of your estate and estate duty and executor fees could apply.

2 ENDOWMENTS

These don’t have to come to an end when you die. The person investing in the endowment decides who the “life assured” is. The life assured is the person on whose life the endowment is issued – this can be the investor or another person. The endowment comes to an end when the life assured dies, at which point the investment is paid out to beneficiaries appointed by the investor.

The money will be paid out directly, so the beneficiaries don’t need to wait for the estate to be wound up, says Sonja Smit from Allan Gray. No executor’s fees are paid on this amount if the proceeds are paid directly to beneficiaries, but it still forms part of the estate for the calculation of estate duty.

3 RETIREMENT FUNDS

The Pension Funds Act applies to all retirement funds. It states that the trustees of the fund are responsible for deciding how your retirement fund money is distributed should you die before retiring. It’s their decision to make even if you’ve made nominations to the fund or stipulated people in your will. Your beneficiaries will be considered, but the trustees need to make sure it’s a fair distribution, Smit says.

The trustees must identify and contact all your dependants, such as spouses, children, anyone proved to be financially dependent on you at the time of death, anyone entitled to maintenance, and even anyone who might in future have become financially dependent on you if you hadn’t died.

Although trustees aim to complete the process as fast as possible, the act gives them at least a year to search for dependants. The process might take even longer if, for example, the deceased had more than one family unit, Smit says. During this time, the benefit is held in a money market fund.

Dependants have various options on how to receive their benefit. They can transfer it to a living or guaranteed life annuity, take a cash lump sum (from which tax might be deducted), or take a combination of a cash lump sum (from which tax might be deducted) and a living or guaranteed life annuity.

Because the money doesn’t become part of your estate, it’s protected against creditors. Even if the deceased had been married in community of property, the retirement fund’s death benefits aren’t subject to marital law.

4 ANNUITIES

It depends whether it’s living or guaranteed. If you have a living annuity, the remaining investment value may be left to your beneficiaries. It doesn’t become part of the estate and isn’t subject to estate duty and executor’s fees.

The beneficiary can take the death benefit (what investment companies call the part that pays out) as a cash lump sum, transfer it to another living annuity, or a combination of both. The cash lump sum might be taxable, so talk to an expert before choosing this option. If no beneficiaries are appointed or if they can’t be traced, the death benefit becomes part of the estate. Then estate duty and executor’s fees can be levied.

Guaranteed annuities usually end when you die, so nothing is transferred, Smit says.

5 UNIT TRUSTS

These don’t require a beneficiary, but you can bequeath the proceeds of your investment in your will, which means they’ll form part of your estate when you die and might be subject to estate duty. Your estate executor distributes all the assets among your creditors (if there are any) and heirs.

6 BANK SAVINGS

This amount can be bequeathed in your will and is distributed according to your wishes. But as with unit trusts, the money in a savings account is subject to estate tax and not protected from creditors.

20%

The percentage in estate duty the SA Revenue Service charges on the first R30 million of the dutiable amount of an estate. It charges 25% estate duty on the amount exceeding that figure after taking into account a deduction of R3,5m against the net value of the estate and any other allowable deductions.

3,5%

The executor’s fee as stipulated by the Administration of Estates Act. This percentage is calculated from the gross estate value on the date of death (excluding assets that fall outside the estate such as pension fund), plus VAT.