Estate Planning: What Happens When You Die?

Confronting your own mortality can be difficult, but death is often accompanied by questions of money. Dealing with death is difficult enough without the added weight of financial stress. It is vital that one formulate a plan to provide for your loved ones in the event of death.

Where do you begin?

Writing a Will is a good place to start. You can download a standard template or consult a lawyer, bank or financial advisor. Make sure you understand the rules surrounding estate planning and the claims process for your current investments. Some products are geared towards estate planning so it is a good idea to do some research.

Here are some products with estate planning advantages:

Tax-free investments (TFIs)

TFIs allow you to save a certain amount and pay no tax on capital gains, interest and dividends. They can have estate-planning advantages if structured as a life policy. You are allowed to nominate beneficiaries when the account is opened. These beneficiaries receive the proceeds of the TFI in the event of your death. TFIs will form part of the estate duty calculation. There are, however, no executor’s fees and the beneficiaries receive the money immediately.

Endowments

Endowments cater to investors with marginal income tax rates higher than 30%. It is quite a complex product. It doesn’t have to stop when you die and you are allowed to make various nominations.

As the policyholder, you will decide who is the life assured party. This is the person who the endowment is issued on. You can be the life assured party or it can be a nomination. The endowment ends when the last life assured nomination dies.

It also allows you to nominate beneficiaries to receive the investment. These nominations receive the money once the last life assured person dies. The money is paid out directly: The estate does not need to be finalized. There are no executor’s fees payable on this amount, but it does form part of the estate duty calculation.

If you don’t nominate any beneficiaries then the investment is paid out to the estate and executor’s fee could apply.

Retirement products

How the death benefit is distributed is the main difference between pre-retirement and post-retirement products. Trustees of the retirement fund control the final decision in pre-retirement products, whereas you control the payout with a post-retirement product.

Pre-retirement products: Provident funds, pension funds, retirement annuity funds and preservation funds

All retirement funds must adhere to the Pension Funds Act. It states that the trustees of a retirement fund are responsible for the allocation of your benefits if you die before retirement. Trustees must perform the following duties:

  • They will identify and find your dependents

Spouses, children, anyone that is financially dependent on you at the time of death or who requires maintenance is defined as a dependent. This includes future financial dependents.

  • They will divide the benefit

Following a thorough investigation, trustees must decide how the benefit should be divided. Any nominees will be taken into account. A nomination does not, however, secure that the person will receive any of the benefit.

  • They will decide how the benefit is paid

They decide whether the payment is made directly to dependents, to a legal guardian or to a trust, which benefits the dependent.

Trustees get up to one year to complete to search for dependents and the process could take longer than that to complete. The benefit is kept in a money market fund during this period.

Dependents and nominees can receive their benefit in a number of ways: It can be transferred to a guaranteed or living annuity. They can take a lump sum of cash, which may be subject to tax deductions, or a combination of the two.

Post-retirement products: Living annuities

After retirement, you have the option of transferring your investment to a product, which can provide you with an income: Like a guaranteed or living annuity. One of the key features of living annuities is that the investment may be left to beneficiaries. Living annuities pay out the death benefit to your beneficiaries and lump sum payments are allowed. These lump sums can be transferred to another living annuity or you can get a combination of the two. Cash payments trigger taxes, but a portion of it is usually tax-free.

Other products available

Unit trusts

These investments don’t require beneficiaries. The proceeds go to your estate after death and may be subject to estate duty. The estate’s executor is required to distribute all assets, which includes the unit trust investment, according to the details of your Will. It’s therefore important to know and understand where your unit trusts are invested and ensure you are updated regularly with the current unit trust prices.

Top estate planning tips

  1. Keep an up to date Will. This gives you control over what happens to your estate after death. If no Will is left, then the laws of interstate succession apply.
  2. Update your beneficiaries. This ensures that the intended recipients receive a speedy payment of their benefits.
  3. Update your nominees’ details. This allows your trustees to think about your wishes during their investigation.
  4. Plan for any immediate needs. This includes things like funeral costs. Financial stress is the last thing a loved one needs in a time of mourning.
  5. Speak to your dependents, beneficiaries and nominees. Update them on any developments in your plan. Ensure that they are aware of the location of important documents, which will make the process a whole lot easier.

Investments only form one part of estate planning. You will need to account for other assets in your plan. Consider consulting a financial planner for help if you are confused or overwhelmed and keeping you up dated with the prices of the underlying investments which could include unit trusts.