Article by Byron Lourens – Independent Wealth Managers

The COVID-19 pandemic has reiterated the fact that life is short and full of unforeseen events. This has reminded us how important it is that your financial affairs are in order and that plans are put in place to ensure your legacy.

On certain policies, a beneficiary nomination will ensure that your wealth is passed on as per your wishes and therefore can be beneficial in estate planning.

The importance and implications of beneficiary nominations on various investment structures will be explained below:

Retirement and Preservation Funds

The beneficiary nominations on a Retirement Fund act as guidance to the funds trustees and indicate your wishes for the funds. The trustees are obligated to identify dependents and may allocate a portion of the funds to a dependent who may not be nominated as a beneficiary. The trustees have a 12 month time frame to go through this process.

It is therefore important to indicate any dependents with full transparency on completion of a beneficiary nomination form, this will decrease the time frame for the funds to be distributed on your demise.

Important considerations:

  • Should the beneficiary be a minor (under 18), the trustees will pay the funds to their guardian.
  • Should no beneficiary be nominated and no dependents identified, the funds may be paid into the Estate.  This may result in tax implications on the proceeds as well as estate duty and executors fees, which could otherwise be avoided through the nomination of a beneficiary.

Tax Free Savings Account (TFSA)

When a beneficiary is nominated on your tax free savings investment, it will result in the funds being paid out on your demise, prior to completion of the winding up of the estate.

Should no beneficiary be nominated, the funds will be paid into the estate and distributed as per the Last Will and Testament along with your other assets. The negative impact of not having a beneficiary nomination on the TFSA is the longer time frame taken for the beneficiaries to receive the proceeds through the estate process, as well as the executor fees levied on the proceeds.

Living Annuity

The beneficiary on a living annuity may be a natural person, the estate or a trust. 

Should a natural person or trust be nominated as the beneficiary on the living annuity, the person/trust will have the following options:

  1. Continuing with an annuity tax free, thereafter being taxed only on the income withdrawn in their hands over time,
  2. Taking the benefit as a lump sum which will result in the value being taxed as per the retirement tax table and taxed as if the deceased had taken the lump sum benefit on the day before death, or 
  3. a combination of both options above.

Should the estate be nominated as the beneficiary of the living annuity, the only option available to the estate is to take the lump sum which will result in the same tax consequences mentioned above in point 2. 

Furthermore, should the estate be nominated, there will be executor fees and estate duty on the Living Annuity value, whereas if the benefit is paid to a natural person or trust directly, there will be no executor fees or estate duty payable.

Why to Nominate a Secondary Beneficiary Where Possible

Nominating a secondary / failing whom beneficiary may assist in the estate planning process where the primary beneficiary is unable to receive the proceeds.

Should an individual nominate their spouse as the sole beneficiary on their Retirement Fund, Living Annuity and Tax Free Savings account, in the event of simultaneous or very close demise, the funds may be paid into the estate as the primary beneficiary is not able to receive the benefits. This will result in estate duty and executor fees being applicable on investment structures which should have the benefit of one or neither being levied.

In the example above, should the individual have nominated their children or other persons as the secondary beneficiaries, the funds will likely be transferred as intended, which will avoid unnecessary executor fee’s and estate duty.

Kindly contact us if you have any questions or concerns, or require further information.