By Jaco Prinsloo
Financial planning regarding the succession of investments is rarely done, 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, can be facilitated properly.
Today I want to focus on the succession planning of investments, specifically discretionary investments, compulsory investments and policies. The type of investment will determine how the assets and proceeds get distributed, so we first need to look at the different investment types:
Discretionary investments
Discretionary investments are any investment you make with after tax money at your own discretion. Discretionary investments include:
- Unit trusts,
- Money market accounts,
- Fixed deposits including bank accounts,
- 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. The proceeds from discretionary investments will be distributed as per 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 transaction or changes can be made to the investments until the proceeds are paid to the estate.
Investment and life policies
Life insurance is a type of insurance contract where you pay premiums, and if you pass away, the life insurance company pays the life cover benefit directly to your nominated beneficiaries, which can be a person or your estate.
You also get investment policies like living annuities and endowment policies where the investment value pays to the nominated beneficiaries on your passing. Examples are an endowment policy and a living annuity (a flexible pension that is linked to the value of your investments and that must be managed).
The pay-out is made directly to your named beneficiaries, giving them access to cash while they wait for the estate to be wound up. This makes it an essential part of your overall financial plan.
Compulsory investments
Compulsory investments are investments with specific tax benefits and rules as to when you can access the investments. These investments are governed by Regulation 28 which stipulates where and how much you can invest in different asset classes. Compulsory investments can be summarised as "retirement funds" and include:
- Pension fund,
- Provident fund,
- Retirement annuity fund, and
- Preservation funds.
In the event of death, the proceeds from retirement funds are distributed according to Section 37C of the Pension Fund Act which means the trustees of the fund will use their discretion to distribute the proceeds of your retirement savings to insure all dependants and beneficiaries receive fair benefits. You will be required to nominate beneficiaries but it’s important to remember the beneficiary nomination is seen as a guide to the trustees or a "wish list" and the ultimate decision on how the benefits get distributed lies with the trustees of the fund.
There can also be approved or unapproved life cover payable in terms of your employment contract. If the life cover is approved, it will also be distributed in terms of the Trustee Resolution. These benefits are subject to tax at the same rate as retirement benefits. If the benefit was unapproved it is paid out in terms of your nomination form and is not subject to tax.
It is important to keep your will and nominated beneficiaries updated on your policies and retirement funds.
How to plan for succession
The first step is to make sure that you know what will pay out and what the options are in the event of your death. Then create an organised folder with all the documentation of your investments, policies, copy of your will and personal documents like your ID copy and bank statements. Telling your next of kin where to find 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 will.
Jaco Prinsloo is a Certified Financial Planner at Alexforbes.
*The views expressed here are not necessarily those of IOL or of title sites.
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