How are your investments managed when you die?

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Many people mistakenly believe that their will governs the distribution of all their assets in the event of death, but this is not the case. Whether an asset falls under your deceased estate and how it is treated, if so, largely depends on the type of asset, the jurisdiction it falls under and the designated beneficiaries.

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

Life annuities

When it comes to planning your estate, life annuities are excellent succession planning tools. When setting up your life annuity, you are free to designate your beneficiaries as you wish and, in the event of death, the funds will be available to them almost immediately – although your beneficiaries will have to tell the administrator of the funds how they wish to receive their benefits. Your beneficiaries will have the option of taking a lump sum withdrawal, transferring the funds to a life annuity in their own name, or a combination of these two options, bearing in mind that up to the first R500,000 may be tax exempt. tax based on the deceased’s retirement history. Your beneficiaries won’t pay tax when transferring the full benefits to a life or life annuity in their own name, but any income from the annuity will be taxed at their personal income tax rates. The proceeds of a life annuity will not form part of your deceased estate, are not subject to inheritance tax and are not subject to executor fees.

Pension funds

Retirement funds, including pension, provident, preservation and superannuation 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 law. legislation, in particular section 37C. At the outset, it is important to understand that pension funds are government incentive financing structures designed to encourage South Africans to save for their retirement and, in doing so, ease the burden on the state. Due to the significant tax advantages of investing in retirement funds, the government aims to ensure that death benefits are distributed to those who are financially dependent on the fund member in the event of their death. As such, Section 37C directs the trustees of the pension fund to determine who is financially dependent, in whole or in part, on the member and, based on their investigation, to allocate the funds accordingly.

Those who qualify as “financial dependents” may include the fund member’s children, spouse, siblings, elderly parents, or anyone who was in some way dependent on the deceased. at the time of his death. Since the death benefits of the member are paid directly to their dependents, the funds do not form part of the estate and are not included in the calculation of the inheritance tax of the deceased. In addition, since the executor does not have to administer these funds, no executor’s fee is payable. Although money held in retirement funds is generally protected from creditors of the deceased, keep in mind that this protection does not extend to Sars tax and/or maintenance claims.

Endowments

Endowments are complex investment policies that generally cater to investors with a marginal tax rate of 30% or more and can also be useful estate planning tools. As the policyholder, you can choose who will be the insured person and designate the beneficiaries of the policy, depending on your estate planning needs. As a general rule, proceeds from an endowment policy are paid on the death of the last insured, with policies paying out immediately. Although not part of the liquidation process, the proceeds of an endowment policy are considered deemed property in a deceased estate and will be subject to inheritance tax. However, as the executor is not responsible for the administration or distribution of these funds, no executor’s fee is payable on the proceeds.

Tax-free investments

When opening a Tax-Free Savings Account (TFSA), you can designate your beneficiaries by completing the application form. Under the Estate Tax Act, the deposits and any returns earned in your TFSA will become part of your deceased estate and will be taken into account for estate tax purposes. Whether or not you can designate a beneficiary of your tax-free investment depends on the nature of the vehicle. If your tax-free investment is for life, you can designate a beneficiary, which means the proceeds, while part of your deceased estate, will be paid directly to your beneficiaries and bypass the liquidation process and avoid settlement fees. ‘executor. On the other hand, if your tax-exempt investment is hosted on a LISP platform, you will not be able to designate a beneficiary and will have to stipulate in your will the fate reserved for these funds. These funds will be subject to inheritance tax and subject to the estate administration process, meaning your loved ones may have to wait for the proceeds. Additionally, as these funds will be administered by your executor, it is likely that they will incur executor fees. As long as the investment is held in the estate, returns from it will remain exempt from income tax, dividend tax and capital gains tax.

Mutual fund

Mutual funds or collective investments are discretionary investments hosted on LISP platforms and regulated by the Collective Investments Control Act 2002. Mutual funds can play an important role in your portfolio, especially when it comes to providing liquidity during your retirement years. When opening a mutual fund portfolio, you do not need to designate a beneficiary as the proceeds from this type of investment are part of your estate and therefore subject to inheritance tax. 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 can take place, although your investment will continue to generate market returns depending on market conditions. market. As such, it is advisable to specify in your will how you wish this proceeds to be distributed, bearing in mind that an executor’s fee is payable out of these funds.

Investments abroad

How your offshore investments are structured will determine how they will be treated in your deceased estate. If you are indirectly invested overseas through a rand-denominated feeder fund on a local LISP platform, these funds will become part of your deceased estate and you will need to manage their distribution in accordance with your South African will. However, if you are investing directly in a fund domiciled overseas, you may need to seek estate planning advice on how these funds will be treated in the event of death, and this will largely depend on the jurisdiction. in which you invest.

Although your South African will generally take care of allocating your assets around the world, certain circumstances, such as direct ownership of shares in a foreign company, may require you to write a will. abroad. Keep in mind that each country has its own set of inheritance laws and it is important to know how these laws affect you if you are investing directly in a foreign country.

In addition, some countries, such as those in civil law jurisdictions, have what are known as mandatory inheritance rights which limit the freedom of bequest. 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 an agreement, you may be liable for inheritance and additional succession.

Type of investment Beneficiary Inheritance rights Executor fees comments
Endowments Designated beneficiary Yes Nope After the death of the last insured
Life annuities Designated beneficiary Nope Nope Only the tax deductible part
Retirement funds Financial dependents Nope Nope Section 37C of the Pension Funds Act
Tax-free investments Designated beneficiary or estate Yes Variable
Mutual fund Domain Yes Yes
Offshore investment Domain Yes Yes
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