Masterclass series

Unpacking beneficiary nominations and intergenerational succession planning

Financial advisors have a valuable role to play in helping clients understand the beneficiary options of  the various products on offer. Insight into how each product applies to estate planning is key.  

Sep 29, 2021

9 minutes

Albert Coetzee
Financial advisors have a valuable role to play in helping clients understand the beneficiary options of  the various products on offer. Insight into how each product applies to estate planning is key.  

Having an up-to-date will and ensuring beneficiary nominations are in order, form an integral part of the financial planning process.

This has become even more important amid the COVID pandemic. Financial advisors should consider the following pertinent questions:

  1. Is the client’s will up to date?
  2. Is there sufficient liquidity for your client’s spouse/partner/dependents in case something unexpected happens?
  3. Where some of the Ninety One products such as the local Ninety One Life Portfolio, Ninety One Global Life Portfolio and the Ninety One Living Annuity (ILLA)1 allow for beneficiary nominations on the application forms:
    • Has the client fully made use of this option?
    • Are the beneficiary nominations up to date?
    • Does your client fully understand how the process will work on their death?
  4. Does your client understand the concept and benefits of nominating an “alternative beneficiary” – which products offer it and most importantly, which investment platforms provide this feature to clients?
  5. Have you been introduced to your client’s beneficiaries so that you can highlight important factors relating to the various products at the time of inheritance?

It is important that clients regularly review and update their will, or when they experience a dramatic change in their life. At the same time, they need to ensure that someone in their household, as well as a lawyer, accountant or financial advisor, knows where to find the original copy of their will.

It is also crucial that clients ensure that there is sufficient liquidity for dependents on their death.

It is also crucial that clients, with the guidance of an estate planning professional, ensure that there is sufficient liquidity for dependents on their death. This has become even more pertinent, given the pandemic and the associated backlogs at the Master’s Office. Delays may cause the transfer of assets/proceeds from a client’s estate to the beneficiaries to take much longer than anticipated. Fortunately, there are investment products which can speed up the process and save costs and taxes. But making provision for sufficient liquidity and ensuring beneficiary nominations are in place and up to date (where applicable), remain key.

Financial advisors have a valuable role to play in helping clients to understand the beneficiary options provided by the various products on offer. It is also important to know how each product/product category applies to estate planning. To unpack these issues, we have identified four main categories:

1 Discretionary investments (which do not offer the option to nominate a beneficiary)

These products can be either local or offshore investments. They can include both unit trust or share portfolios, and on a client’s death, their will is taken into account. On receipt of a client’s death certificate, Ninety One will change the status of their investment to “estate late”. Nothing further will happen to this investment until the Master’s Office appoints an executor to deal with their estate in terms of their will. Therefore, it is vital that they have an updated will, and that the person who is going to deal with their financial affairs on their death knows where to find an original copy of their will.

Unfortunately, because of the COVID pandemic, this process has become exceptionally slow. As mentioned above, the provision of liquidity is crucial. A client needs to make sure that they leave enough liquidity in the hands of their spouse/partner/dependents. This is particularly important if they are invested in products that do not offer the option of nominating a beneficiary and therefore form part of their estate (to be dealt with in terms of their will). It will also be a capital gains tax (CGT) event (maximum 18%) if someone other than the spouse inherits in the will.

2 Retirement fund investments

Here we refer to products such as pension funds, provident funds, retirement annuities, preservation pension funds and preservation provident funds. In short, this comprises any product governed by the South African Pensions Fund Act. Even though all these products do allow the investor to nominate beneficiaries (or to change these at any time), Section 37C of the Pensions Fund Act stipulates that the trustees of these funds need to determine who the dependents and nominees are, and allocate the benefit in a fair manner, considering various factors. This means that the trustees of the fund(s) may award these investments to someone other than the person nominated by the deceased. The trustees of the fund(s) have up to 12 months to conduct an investigation and to allocate the benefit. As a last resort, they will instruct that the proceeds be paid to the estate of the deceased, if no dependents are found and no beneficiaries were nominated. This can be a lengthy process, especially if the client’s family structure or circumstances are complicated, again highlighting the importance of considering the liquidity needs of loved ones.

3 Policy wrappers (Ninety One local and global Life Portfolios governed by the South African Long-term Insurance Act)

These products have many attractive features, including the beneficiary options they provide. Here are some pertinent points:

  1. The beneficiary nomination a client makes on the forms will “override” their wishes in their will. Because of this, it is vital that clients review their nominated beneficiaries often to make sure that they are still alive (and that their circumstances have not changed). If they are not alive at the time of a client’s death, the investment proceeds will be paid out to the estate of the deceased client, net of CGT, fixed at 12%.
  2. If we assume that they are alive at the time of a client’s death, what are the benefits of having nominated beneficiaries?
    • There is no need to wait for the Master’s Office to appoint an executor, which speeds up the process dramatically.
    • If the client’s nominated beneficiaries accept the nomination, there will be no need to involve the executor to deal with these products. This factor may further speed up the payment process and no executor fees will be charged in respect of these products, which can be as high as 4.03%.
    • If the nominated beneficiary(ies) agree to take over the products from the deceased (instead of cashing them in) there will be no forced CGT (12% as per the Ninety One local and global Life Portfolios). Product transfers to the nominated beneficiaries will be tax neutral, which may contribute to a huge tax saving for your client’s estate.
    • If the nominated beneficiary(ies) die at the same time as the client, or predecease the client without the nominations being updated, the proceeds will need to be paid out to the estate of the deceased client net of CGT, as indicated earlier. However, this is where the alternative beneficiary option offered by Ninety One’s local and global Life Portfolios comes into play. An alternative beneficiary will only stand to inherit on the simultaneous death of the investor and primary beneficiary(ies), or if the primary beneficiary(ies) predeceased the investor and were not replaced before the investor passed away. An alternative beneficiary nomination is very useful to prevent a “forced” payout to the estate of the deceased, thereby avoiding incurring high taxes and costs. The “estate” of the deceased can also be nominated as an alternative beneficiary where Ninety One will take guidance from the executor of the estate. If the “estate” is nominated as either a primary or alternative beneficiary (Ninety One Global Life Portfolio), then overseas probate may apply.
4 Ninety One ILLA governed by the South African Long‑term Insurance Act:
  1. The beneficiary nomination a client makes on the forms will “override” their wishes in their will. Because of this, it is vital that clients review their nominated beneficiaries often to make sure that they are still alive (and that their circumstances have not changed). If they are not alive at the time of a client’s death, the investment proceeds will be paid out to the estate of the deceased client net of various taxes, which can be as high as 36%. The retirement tax tables will apply (taxed in the hands of the deceased).
  2. If we assume that they are alive at the time of a client’s death, what are the benefits of having nominated beneficiaries?
    • There is no need to wait for the Master’s Office to appoint an executor, which speeds up the process dramatically.
    • If the client’s nominated beneficiaries accept the nomination, there will be no need to involve the executor to deal with these products. This factor may further speed up the payment process and no executor fees will be charged in respect of these products, which can be as high as 4.03%.
    • If the nominated beneficiary(ies) agree to take over the ILLA product from the deceased (instead of cashing it in), there will be no forced taxes applicable, as mentioned earlier. Product transfers to the nominated beneficiaries will be tax neutral, which may contribute to a huge tax saving for the client’s estate.
    • If the nominated beneficiary(ies) die at the same time as the client, or predecease the client without the nominations being updated, the proceeds will need to be paid out to the estate of the deceased client, net of the retirement tax table. As mentioned earlier, the proceeds will be taxed in the hands of the deceased; the rate can be as high as 36%. However, this is where the alternative beneficiary option offered by Ninety One’s ILLA product comes into play. An alternative beneficiary will only stand to inherit on the simultaneous death of the investor and primary beneficiary(ies), or if the primary beneficiary(ies) predeceased the investor and were not replaced before the investor passed away. An alternative beneficiary nomination is very useful to prevent a “forced” payout to the estate of the deceased, thereby avoiding incurring high taxes and costs which could have been prevented. The “estate” of the deceased can also be nominated as an alternative beneficiary where Ninety One will take guidance from the executor of the estate. Another option can also be to nominate an inter vivos or a testamentary trust as either a primary or alternative beneficiary of the Ninety One ILLA product.

In conclusion

Financial advisors have a valuable role to play in helping clients to understand the beneficiary options provided by the various products on offer. It is also important to know how each product/product category applies to estate planning. We trust this article serves as a useful guide when discussing a client’s overall investment plan, including estate planning. Beneficiaries may not have a good understanding of the investment products discussed above. As a consequence, they may not always make decisions that best serve their needs. For example, a beneficiary may decide to cash in a product on the death of an investor, thereby incurring various taxes that could have been avoided. Financial advisors should urge their clients to introduce their beneficiaries to them. This will enable financial advisors to get to know these beneficiaries and assist them in making suitable choices in respect of products that form part of their inheritance.

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1 An ILLA is an investment-linked life annuity.

Albert Coetzee
Head of the Global Investment Platform

Important information

All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an adviser or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. We endeavour to provide accurate and timely information, but we make no representation or warranty, express or implied, with respect to the correctness, accuracy or completeness of the information and opinions. We do not undertake to update, modify or amend the information on a frequent basis or to advise any person if such information subsequently becomes inaccurate. Any representation or opinion is provided for information purposes only. The investments referred to in this document are generally medium- to long-term investments. Their value may go down as well as up and past performance is not necessarily a guide to future performance. Fluctuations or movements in exchange rates may cause the value of the underlying international investments to go up or down. Additional information may be obtained, free of charge, at www.ninetyone.com.

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