What happens to your investments after your death?

FINANCIAL planning regarding the succession of investments is rarely carried out, at least in South Africa. As a result, potential heirs are often not sure what to do or where to start to claim and settle a loved one's investments. In many cases, the family is unaware of the existence of an investment portfolio. With succession planning, the transfer of assets (whether property, your bank accounts, cars or investments) is facilitated.

Here I want to focus on the succession planning of investments, specifically discretionary investments, compulsory investments and life policies. The type of investment determines how the assets and proceeds get distributed.

Discretionary investments

Discretionary investments are any investments you make with after-tax money at your own discretion. They include:

Unit trusts,

Money market accounts,

Fixed deposits,

South African retail bonds,

Share portfolios, and

Tax free savings accounts.

These investments will form part of your estate and will be subject to estate duty and executor's fees. However, although a tax-free savings account forms part of your estate, there are no executor’s fees payable.

The proceeds from the investments will be distributed according to your will to your nominated beneficiaries after your estate has been settled. Because these investments form part of your estate, the investments will be “frozen” and no transactions or changes can be done before the proceeds are paid to the estate.

Life policies

Life insurance is a type of contract where you agree to pay premiums to keep your life cover active. If you pass away, the insurance company will pay the life cover benefit directly to your nominated beneficiaries, who are the people (or person) you nominate to receive the payout. In the absence of nominated beneficiaries, the benefit is paid into your estate.

Life insurers also offer investment products, such as living annuities and endowment policies, where the investment value pays to the nominated beneficiaries on your passing.

An advantage of these policies is that the benefit does not form part of your estate, which means it does not attract estate duty, and the proceeds get paid directly to your nominated beneficiaries. This gives them immediate access to cash while they wait for the estate to be wound up, making it an essential part of anyone's overall financial plan.

Compulsory investments

Compulsory investments are retirement-related investments that are compulsory with many employers.

As an employee you might be required to belong to a provident or pension fund as part of your employment contract. Compulsory investments offer tax benefits, but investors have limited access to their money. They are governed by the Pension Funds Act and its accompanying regulations. Regulation 28 stipulates where and how you can invest.

Retirement-fund investments include:

Pension funds,

Provident funds,

Retirement annuity funds, and Preservation funds.

The proceeds from retirement funds are distributed according to Section 37C of the Pension Funds Act, which states that the trustees of the fund must use their discretion to distribute the proceeds of your retirement savings to ensure that all dependents and beneficiaries receive equal and fair benefits.

As a member of a retirement fund you are required to nominate beneficiaries, but it is important to remember the beneficiary nomination is used as a guide by the trustees, who ultimately decide on how the benefits get distributed.

How to plan?

As shown above, it is important to keep your will up to date as well as the nominated beneficiaries on your policies and retirement funds. So how to plan for succession?

The first step is to talk to your family members about your investments and providers and administrators of these investments.

Second, you can create an organised folder with all the documentation of your investments, policies, copy of your Will and personal documents such as your ID copy and bank statements.

Your family does not need to know the value of the investments but the knowledge of the investments and where to find all your important documents will make it easier for them to start the claim process.

Speak to a Certified Financial Planner for advice on your beneficiary nominations and to formalise your wishes in a document, thus setting up a will.